ITAD BIR Ruling No. 009-09

April 1, 2009 ITAD BIR RULING NO. 009-09 Article 10, Philippines-Japan Tax Treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated December 17, 2007, on behalf of Mitsubishi Corporation-Tokyo Head Office (Mitsubishi Tokyo) , requesting confirmation of your opinion that the dividends paid by Laguna Technopark, Inc. (LTI) to Mitsubishi Tokyo is subject to final withholding tax at the preferential rate of ten percent (10%), pursuant to the Philippines-Japan tax treaty. aSITDC It is represented that Mitsubishi Tokyo is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan; that Mitsubishi Tokyo is organized and existing under the laws of Japan and licensed to do business in the Philippines on March 20, 1967 as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on October 9, 2007; that Mitsubishi Tokyo is licensed to do business in the Philippines through a branch, Mitsubishi Corporation-Manila Branch (Mitsubishi Manila); that LTI is a corporation duly organized and existing under the laws of the Philippines with principal address at 2F LTI Admin Building 1, North Main Avenue, Laguna Technopark Bian, Laguna; that LTI is primarily engaged in the real estate business, ( i.e. , among others, real estate development, lease or sell real estate property, develop and sell real estate projects, invest in shares of stock of real estate companies). It is further represented that, per LTI Assistant Corporate Secretary's Certificate dated December 17, 2007, for a period of at least six (6) months prior to the declaration and payment of the dividends on 28 December 2007, Mitsubishi Tokyo held Ten Thousand Sixty-Four (10,064) common shares with a par value of One Thousand (Php1,000.00) per share, for a total par value of Ten Million Sixty-Four Thousand Pesos (Php10,064,000.00), representing 25% of the outstanding and voting shares of LTI; that on December 17, 2007, the Board of Directors of LTI resolved by and among the principal stockholders to approve the declaration of special cash dividends out of the retained earnings as of December 31, 2006, in the aggregate amount of Seven Hundred Ninety-Eight Million One Hundred Sixty Thousand Four Hundred Sixty-Three and 32/100 (P798,160,463.32) to the holders of common shares as of record date December 17, 2007, payable on or before December 28, 2007. It is finally represented that Mitsubishi Manila has no investments in LTI and does not own shares of stock in LTI as shown in the latter's latest audited financial statements; that Mitsubishi Manila likewise does not use or hold for use in the conduct of its trade or business any shares of stock in LTI; that Mitsubishi Tokyo acquired the LTI shares but the said acquisition was made directly by Mitsubishi Tokyo without the participation of Mitsubishi Manila; that all dividends from LTI were remitted to Mitsubishi Tokyo and that Mitsubishi Manila did not receive any of the dividends; that Mitsubishi Manila is not a material factor in the realization of dividends paid by LTI to Mitsubishi Tokyo, as evidenced by an Affidavit dated 12 February 2008 executed by the Treasurer of Mitsubishi Manila; and that the subject transaction 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997 as amended, applies, in general, to dividends received by nonresident corporation from the Philippines. 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, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). cEAaIS 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, the provisions of the Philippines-Japan tax treaty, particularly Article 10 thereof may apply to the instant case. Article 10 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. ICaDHT xxx xxx xxx" In relation thereto, in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) the Supreme Court held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation its conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, since it is represented that though the Japanese corporation has a Philippine branch, the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation, income derived through the payment of dividends by LTI to Mitsubishi Tokyo shall be considered as income of Mitsubishi Tokyo as ruled in the aforecited case of Marubeni vs. CIR (G.R. No. 76573). In view thereof, since Mitsubishi Tokyo holds directly 25% of the outstanding and voting shares of LTI for a period of six months prior to the declaration of dividends, said dividends paid by LTI to Mitsubishi Tokyo are subject to preferential tax rate of ten percent (10%) pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. 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. ACTESI Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue