ITAD BIR Ruling No. 007-10

May 20, 2010 ITAD BIR RULING NO. 007-10 Article 10, Philippines-Japan tax treaty; Section 28, NIRC of 1997 Atty. Rolando P. Nonato Rm. 406 Tulips Center, A.S. Fortuna St. Balikid, Mandaue Cebu City Attention: Atty. Rolando P. Nonato Legal Counsel Gentlemen : This refers to your letter dated March 18, 2009 requesting confirmation of the application of a preferential tax rate of fifteen percent (15%) on the dividend payments of Merasenko Corporation (hereinafter referred to as "Merasenko" ) to Senko Medical Trading Co. Ltd. (hereinafter referred to as "Senko" ) and Senshin Medical Instrument Co. Ltd. (hereinafter referred to as "Senshin" ) pursuant to 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 (hereinafter referred to as the Philippines-Japan tax treaty ),as amended. TSDHCc It is represented that Senko and Senshin are nonresident foreign corporations organized and existing under the laws of Japan with principal office address at 3-23-13 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan, with Tax ID Nos. 00140783 per certification dated January 30, 2009 and 00124125 per certification dated November 26, 2008, respectively; that Senko and Senshin are not registered either as corporations or as partnerships in the Philippines, as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission respectively dated March 11, 2009 and May 29, 2008; that Merasenko is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at Mactan Economic Zone 2 Basak, Lapulapu City, Cebu; that Merasenko is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 95-124; that Merasenko is an export enterprise engaged in the manufacture/export medical instruments such as blood tubing, circuit for dialysis, surgical knife sharpener, F-type breathing circuit, infusion line and tracheostomy tube. It is also represented that Merasenko has a total subscribed and paid-up shares of Four Hundred Eighty-One Thousand Two Hundred Forty-Four (481,244) shares, amounting to Forty-Eight Million One Hundred Twenty-Four Thousand Four Hundred Pesos (P48,124,400.00);that as of February 18, 2009, Senko has 53,132 subscribed and paid up Merasenko shares amounting to Five Million Three Hundred Thirteen Thousand Two Hundred Pesos (P5,313,200.00) and Senshin has 16,661 subscribed and paid up Merasenko shares amounting to One Million Six Hundred Sixty-Six Thousand One Hundred Pesos (P1,666,100.00) respectively representing 11.04% and 3.46% of the subscribed and paid up capital of Merasenko ,as evidenced by a certification issued by the Corporate Secretary of Merasenko dated March 2, 2009; that at a special meeting held on February 18, 2009, the Board of Directors of Merasenko declared cash dividends amounting to One Million Six Hundred Eighty-Four Thousand Pesos (P1,684,000.00) out of the unrestricted retained earnings or surplus profits of Merasenko as of fiscal year ended September 30, 2007, in favor of the stockholders of record as of September 30, 2008 as evidenced by a duly notarized Resolution of the Board of Directors of Merasenko dated February 18, 2009; that said cash dividends were paid and remitted on February 18, 2009; and that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended provides as follows: "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. TAHcCI xxx xxx xxx" In accordance with the foregoing, Article 10 of the Philippines-Japan tax treaty may apply to the subject request for ruling. It 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: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 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) 25 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. 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 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% of the gross amount of dividends if the latter holds at least twenty-five percent (25%) either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate shall apply. cETCID In relation thereto, a 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 took effect on January 1, 2009, Article III of which reads as follows: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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." (Emphasis supplied) Pursuant to Article III of the above Protocol, the 25% shareholding requirement under Article 10 (2) of the Philippines-Japan tax treaty was reduced to 10%. Moreover, the 25% preferential tax rate which applies in all other cases was reduced to fifteen percent (15%). In view of all of the foregoing and considering that during the period of 6 months immediately preceding the date of payment of the cash dividends on February 18, 2009, Senko owns 53,132 shares which represents 11.04% of the outstanding shares of Merasenko ,the dividends paid to Senko by Merasenko are subject to the 10% preferential tax rate; and since Senshin owns 16,661 shares which represents 3.46% shares of Merasenko ,the cash dividends paid to Senshin shall be subject to 15% preferential tax rate, pursuant to the Article 10 of the Philippines-Japan tax treaty, as amended by Article III of its Protocol. 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.) JOEL L. TAN-TORRES Commissioner of Internal Revenue