ITAD BIR Ruling No. 010-14

January 20, 2014 ITAD BIR RULING NO. 010-14 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Ishida Philippines Tube Co., Inc. Lot 3 Block 5, First Cavite Industrial Estate Bo. Langkaan, Dasmarias, Cavite Attention: Mamoru Hirabayashi President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 24, 2013, requesting confirmation that the dividends to be paid by Ishida Philippines Tube Co., Inc. ("Ishida-Philippines") to Ishida Ironworks Co., Ltd. ("Ishida-Japan") are subject to preferential rate of 10 percent pursuant to Article 10 of 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 ("Philippines-Japan tax treaty, as amended"). It is represented that Ishida-Japan , with address at 95 Oaza-Kennyuryusaku, Kisosaki Town, Kuwana Country, Mie Prefecture, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Residence Certificate issued by the District Director of Kuwana Tax Office dated August 16, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated June 3, 2013; and that, on the other hand, Ishida-Philippines is a corporation organized and existing under the laws of the Philippines, with principal address at Lot 3 Block 5, First Cavite Industrial Estate Bo. Langkaan, Dasmarias, Cavite. It is further represented, that at the special meeting of the Board of Directors of Ishida-Philippines held on June 18, 2013, a resolution was approved declaring cash dividends in the amount of Php13,200,000.00 out of the unrestricted retained earnings of Ishida-Philippines , payable on or before June 28, 2013; that Ishida-Japan is one of Ishida-Philippines' stockholders which is entitled to receive dividends; that based on the Corporate Secretary's Certificate of Ishida-Philippines issued on June 24, 2013, Ishida-Japan acquired by purchase 626,995 common shares of stocks in Ishida-Philippines valued at P100.00 per share equivalent to P62,699,500.00 and which represents 94.9992% ownership in Ishida-Philippines ; and that, based on a Certification issued by the Bank of the Philippine Islands dated June 28, 2013, such dividends were remitted to Ishida-Japan on June 26, 2013. ISTECA It is finally represented, per Certification dated May 30, 2013 issued by Ishida-Philippines , that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or 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 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 interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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 invoke, 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. IHSTDE 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 percent 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. 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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Ishida-Japan holds 94.9992 percent ownership in Ishida-Philippines , and that Ishida-Japan held these shares since July 2004 or more than six months immediately preceding the date of payment of the dividends, the dividends paid by Ishida-Philippines to Ishida-Japan are subject to the preferential tax rate not exceeding 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 foregoing 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. AScTaD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue