ITAD BIR Ruling No. 008-10

June 3, 2010 ITAD BIR RULING NO. 008-10 Article 10, Philippines-Japan Tax Treaty, as amended by its Protocol; Section 32 (B) (5), NIRC of 1997 Kirin Holdings Company, Limited 10-1, Shinkawa 2-chome Chuo-Ku, Tokyo 104-8288 Japan Attention: Keiji Konzo Authorized Representative Gentlemen : This refers to your letter dated February 5, 2009 requesting confirmation that the ten percent (10%) preferential tax rate is applicable on the dividends received by Kirin Holdings Company Limited (hereinafter referred to as "Kirin" ) from San Miguel Corporation (hereinafter referred to as "SMC") 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 ). TDaAHS It is represented that Kirin is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at 10-1, Shinkawa, 2-chome, Chuo-ku, Tokyo, Japan, registered with the Commercial Register Office of the Tokyo Legal Affairs Bureau with registration number 0199-01-034768; that Kirin is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on February 5, 2009; that on January 16, 2009 Kirin is a stockholder of SMC owning the 628,640,175 shares with a total par value of P3,143,200,875.00 which represents 19.92% of the outstanding capital stock of SMC and holds the share in SMC during the period of at least six (6) months immediately preceding the date of payment of the dividends as evidenced by a Certification issued by the Corporate Secretary of SMC dated February 3, 2009; that on a regular meeting of the Board of Directors of SMC held on December 8, 2008, Resolution No. 2008-12-08-01 was passed and approved declaring dividends of Thirty-Five Centavos (P0.35) per share, to be paid on February 10, 2009 to all stockholders of record as of January 16, 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 dividend payments to a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (NIRC of 1997) 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, . . .: 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 NIRC 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. ICHcaD xxx xxx xxx" In accordance with the foregoing, Article 10 of the Philippines-Japan tax treaty may apply to the subject request for ruling: "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 later 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. 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: TSAHIa "(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%. 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 10, 2009, Kirin owns 628,640,175 shares which represents 19.92% of the outstanding shares of SMC, the dividends paid to Kirin by SMC are subject to 10% preferential tax rate pursuant to 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. Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue