ITAD BIR Ruling No. 006-14

January 17, 2014 ITAD BIR RULING NO. 006-14 Article 10, Philippines-Japan Tax Treaty Furukawa Electric Autoparts Philippines, Inc. 113 East Main Avenue Lot 3-5, Phase 4, Brgy. Loma Bian, Laguna Attention: Ms. Sylvia R. Castillo General Manager Gentleman : This refers to your tax treaty relief application filed on May 8, 2013 requesting confirmation that the dividend payment of Furukawa Electric Autoparts Philippines, Inc. ("FEAP") to Furukawa Automotive Systems, Inc. ("FASI") is subject to the preferential tax rate of 10 percent based on 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 (Philippines-Japan tax treaty), as amended. 1 It is represented that FASI, with office address at 5-20, Tachibana-Cho, Hikone, Shiga, Japan, is a corporation organized and existing under the laws of Japan and is resident of Japan within the meaning of the Philippines-Japan tax treaty per Certificate of Residence issued by the Hikone Tax Office on April 10, 2013; that FASI is not registered as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 7, 2013; that, on the other hand, FEAP is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at 113 East Main Avenue, Lot 3-5, Phase 4, Brgy. Loma, Bian, Laguna. It is also represented that FASI is the legal and beneficial owner of 2,465,828 common stocks, valued at Php246,582,800.00 and constituting 99.99996%, ownership in FEAP; that the shares of FASI in FEAP were acquired by FASI through share purchase agreement between FASI and Furukawa Electric Co., Ltd. on March 26, 2012 per certification issued by the Corporate Secretary of FEAP dated April 29, 2012; that at an Organizational Meeting held on March 26, 2013, the Board of Directors of FEAP declared cash dividend in the amount of Two Hundred Thirty Million Japanese Yen (JP230,000,000.00) as of December 2012; and that payment for the said dividend will be paid by FEAP on December 20, 2013 per sworn Certification issued by FEAP. STIcEA It is finally represented, based on the Sworn Statement by the same Corporate Secretary on April 24, 2013, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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, rents, royalties . . .: 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 relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It states that: "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. TcCEDS 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: 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. xxx xxx xxx" 4. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. Considering that FASI is the beneficial owner of 2,465,828 common shares in FEAP which constitutes 99.99996% ownership in FEAP which were acquired by FASI on March 26, 2012 or more than 6 months immediately preceding the date of payment of dividend which will be on December 20, 2013 as shown in the certification issued by the Corporate Secretary of FEAP dated April 29, 2012, then the dividend to be paid to FASI by FEAP will be subject to 10 percent of the gross amount of dividend, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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. ADcEST Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending 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.