ITAD BIR Ruling No. 008-15

January 13, 2015 ITAD BIR RULING NO. 008-15 Article 10, Philippines-Japan Tax Treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on March 8, 2013 on behalf of TSUKIDEN SOFTWARE CO., LTD. ("TSCL"), requesting confirmation that dividend paid by TSUKIDEN SOFTWARE PHILIPPINES, INC. ("TSPI") to TSCL is subject to the 10 percent preferential tax rate pursuant to the amended 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 by Protocol 1 ("Philippines-Japan tax treaty, as amended'') . It is represented that TSCL, with address at 68 Okidaka, Taiheiji-aza. Fukushima City, Fukushima, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate issued by the District Director of Fukushima Tax Office on February 1, 2013; that TSCL is not registered either 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 dated February 12, 2013; and that TSPI on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 21st Floor, One Corporate Center, Julia Vargas corner Meralco Avenue, Ortigas, Pasig City. It is also represented that on December 5, 2012, the Board of Directors of TSPI approved the declaration of cash dividend for a total amount of Thirty Million Pesos (Php30,000,000.00) in favor of all stockholders of record as of September 30, 2012 on the basis of the outstanding capital stock of record as of September 30, 2012; and that the said dividend was remitted to TSCL on March 18, 2013 as evidenced by Bank Certification of the Union Bank dated March 21, 2012. It is further represented, per Secretary's Certificate dated February 14, 2013, that as of September 30, 2012, TSCL owns 663,334 common shares which includes the eight (8) shares held by its 8 nominees to the TSPI's Board of Directors with an aggregate par value of Php66,333,400.00 constituting 100% ownership in TSPI; and that these shares were acquired by TSCL through direct subscription, merger, stock dividends and deed of transfer on various dates from December 4, 1991 to February 29, 2012. THIAaD Finally, it is represented 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 per the Sworn Statement issued by TSPI dated February 4, 2012. 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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked may apply to the instant case. 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 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. caTESD 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. 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, a trade of business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the dividends are taxable in that other Contracting State according to its own law. 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. This being the case, inasmuch as TSCL, a resident of Japan with no fixed place of business in the Philippines, holds directly 100% of the outstanding capital stock of TSPI (which in fact exceeds the minimum required percentage of holding of 10 percent), and since TSCL maintains such holdings since December 4, 1991 to February 29, 2012, and, in effect, more than six months immediately preceding the date of payment of the dividend, said dividend paid by TSPI to TSCL is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau 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.