ITAD BIR Ruling No. 006-11

January 19, 2011 ITAD BIR RULING NO. 006-11 Article 10, Philippines-Japan Tax Treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 8-10; BIR Ruling No. 7-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 35-10 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Malou Lim Partner Gentlemen : This refers to your Tax Treaty Relief Application filed on October 15, 2010, on behalf of your client, TOSHIBA CORPORATION ("Toshiba") , requesting confirmation that dividends to be paid to it by TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. ("TIP") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, as amended ("Philippines-Japan tax treaty"). IDETCA It is represented that Toshiba is a nonresident foreign corporation organized and existing under the laws of Japan with office addresses at No. 1-1 Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, per Certificate of Status of Taxable Person issued by the Chief of Shiba Taxation Office dated October 1, 2010; that Toshiba is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated October 15, 2010; that on the other hand, TIP is a domestic corporation with office address at 103 East Main Avenue Extension, Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is also represented that TIP is a wholly-owned subsidiary corporation of Toshiba and that it is the original incorporator, as well as subsequent investor in TIP during the past fourteen (14) years per Secretary's Certificate dated September 15, 2010; that in the Secretary's Certificate dated November 26, 2010, it is provided that Toshiba owns 2,341,008 voting common shares of TIP out of the 2,341,015 issued voting common shares of TIP, during the period of six months prior to the date of payment of the dividends; that at the special meeting of the Board of Directors of TIP held on September 13, 2010, it was resolved that a cash dividend amounting to Twenty-One Million Three Hundred Thousand United States Dollars ($21,300,000.00) be paid not later than November 30, 2010 to all stockholders of record in proportion to their respective equity holdings in TIP; and that, per Sworn Statement of TIP dated October 12, 2010, the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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. xxx xxx xxx" In this particular case, the treaty involve is the Philippines-Japan tax treaty, as amended, which, in its Article 10, provides: "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: SECIcT (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. xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent of the gross amount dividends if the latter holds at least 10 percent either of the voting shares or of the total shares during the period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent preferential tax rate shall apply. In view of the foregoing, since Toshiba owns more than 10 percent of the outstanding shares of the common voting stock of TIP, the paying corporation, during the period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends to be remitted by TIP to Toshiba are subject to the preferential rate of 10 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 7-10 dated May 20, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 35-10 dated September 14, 2010) 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. EDATSI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue