ITAD BIR Ruling No. 007-11

January 19, 2011 ITAD BIR RULING NO. 007-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 7-10 Manabat Delgado Amper & Co. 5th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Atty. Tristan L. Lopez Senior Tax Manager Atty. Fredieric B. Landicho Tax Partner Gentlemen : This refers to your letter dated January 27, 2010 requesting confirmation that dividends to be paid by Ayala Corporation ("Ayala") to Mitsubishi Logistics Corporation ("Mitsubishi Logistics") are subject to income tax in the Philippines at the rate of 15 percent 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 ("Philippines-Japan tax treaty") , as amended by a Protocol 1 effective January 1, 2009. EITcaD Basic Facts It is represented that Mitsubishi Logistics is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan, based on the Residence Certificate issued by the Nihonbashi Tax Office in Japan on June 23, 2010; that Mitsubishi Logistics is situated at 19-1, Nihonbashi 1-Chome, Chuo-Ku, Tokyo, Japan; that Mitsubishi Logistics is not registered as a corporation or as a partnership in the Philippines, based on the Certification of Non-Registration issued by the Securities and Exchange Commission on February 2, 2010; and that, on the other hand, Ayala is a domestic corporation, situated at the 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City, Philippines. It is further represented that on December 10, 2009, the Board of Directors of Ayala , at its regular meeting, passed and approved Resolution No. B-10-09 authorizing the declaration of regular cash dividends for the second semester of 2009, equivalent to PHP2.00 per share, in favor of the stockholders of record as of January 8, 2010, based on the Certificate issued by the Assistant Corporate Secretary of Ayala on December 23, 2009; that the dividends will be taken out of the unappropriated retained earnings of Ayala and will be paid on February 2, 2010; and that as of January 8, 2010, Mitsubishi Logistics holds 300,427 of the total outstanding common shares of Ayala (equivalent to 0.0602 percent), with a par value of PHP50.00 each, based on the Certificate issued by the same Assistant Corporate Secretary on January 15, 2010. It is finally represented that the dividends subject of the application for tax treaty relief are not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Certification issued by the same Assistant Corporate Secretary on February 22, 2010. Ruling In reply, please be informed that paragraphs 1, 2 and 3, Article 10 of the Philippines-Japan tax treaty, as amended, 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: ESCDHA 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, but the rate of income tax that may be imposed thereon, beginning January 1, 2009, shall not exceed (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 percent 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) 10 percent of the gross amount of the dividends 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Mitsubishi Logistics merely holds 0.0602 percent of the total outstanding shares of Ayala , such dividends to be paid by Ayala to Mitsubishi Logistics are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 7-10 dated May 20, 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. EDATSC 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.