ITAD BIR Ruling No. 004-14

January 16, 2014 ITAD BIR RULING NO. 004-14 Article 10 (Dividends); Philippines-Japan tax treaty MM Steel Service Center Corporation People's Technology Complex-SEZ Bo. Cabilang Baybay Carmona, Cavite Attention: Joan A. Oriondo Admin & Finance Manager Gentlemen : This refers to your tax treaty application ("TTRA") filed on September 24, 2013, requesting confirmation that dividends paid by MM Steel Service Center ("MM Steel") to Marubeni-Itochu ("Marubeni") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income ("Philippines-Japan tax treaty"), as amended by the 2009 Protocol. It is represented that Marubeni is a foreign corporation organized and existing under the laws of Japan with business address at Nihonbashi 1-Chome Bldg., 4-1 Nihonbashi 1-Chome, Chuo-ku, Tokyo, Japan; that it is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on August 12, 2013; and that, on the other hand, MM Steel is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at People's Technology Complex-SEZ, Bo. Cabilang Baybay, Carmona, Cavite. It is also represented that Marubeni is the registered owner of Two Million Fifty-Two Thousand One Hundred Twenty-Three (2,052,123) common shares constituting 60% of MM Steel's issued and outstanding shares; that all shares were acquired on February 1, 1991; that on May 22, 2013, the Board of Directors of MM Steel declared cash dividends amounting to US$1,693,790.55 in favor of all shareholders of record as of December 31, 2012 on the basis of the outstanding capital stock held by shareholders, payable on September 30, 2013; and that on September 30, 2013 MM Steel transmitted an outward remittance via telegraphic transfer to Mizuho Bank Ltd., Tokyo, Japan the amount of US$914,646.90 in favor of Marubeni, per certification issued by Mizuho Bank, Ltd., Manila Branch. It is further represented, per sworn certification issued on August 16, 2013 by the President of MM Steel that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. ECTIcS In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to Marubeni are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends . . . subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 1, 2, & 3 of Article 10 thereof provide: "Article 10 "(1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. (2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: cSEAHa a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. (3) Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends." Under paragraphs 2 and 3 of Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not exceeding (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, the dividend paid by MM Steel to Marubeni is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) Marubeni holds 2,052,123 common shares constituting 60 percent of the total shares of MM Steel, which is more than ten percent (10%) of the capital of the said company; and (2) Marubeni holds the said shares during the period of 6 months immediately preceding the date of payment of the dividends on September 30, 2013 or since February 1, 1991. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.