ITAD BIR Ruling No. 011-11

January 19, 2011 ITAD BIR RULING NO. 011-11 Article 10 in relation to Article 5, Philippines-Japan tax treaty, as amended; Section 28, Tax Code of 1997; BIR Ruling No. ITAD-059-10; BIR Ruling No. ITAD-060-10; BIR Ruling No. DA-ITAD-069-10 Philippine Resins Industries, Inc. Unit 2104 Antel 2000, Corporate Center 121 Valero Street, Salcedo Village Makati City Attention: Tomoyuki Koike President Gentlemen : This refers to your letter dated March 23, 2009 requesting confirmation that the cash dividends paid by Philippine Resins Industries, Inc. (hereinafter referred to as "Resins" ) to Tosoh Corporation (hereinafter referred to as "Tosoh" ) and Mitsubishi Corporation (hereinafter referred to as "Mitsubishi" ) are subject to a 10 percent preferential tax rate pursuant to Article 10 (3) of 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" ). ISAcHD It is represented that Tosoh is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 4560 Kaisei-cho, Shuunan-shi, Yamaguchi 746-8501, Japan with Tax Reference No. 385034 per certification dated February 10, 2009 issued by the District Director of Tokuyama Tax Office; that it is neither registered as a corporation nor as a partnership business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated February 9, 2009; that Mitsubishi is also a nonresident corporation organized and existing under the laws of Japan with office address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan with Tax Reference No. 00620602 as evidenced by a Residence Certificate issued by the District Director of Kojimachi Tax Office dated March 6, 2009; that Mitsubishi was issued a license to engage in business in the Philippines on March 20, 1967 and that to date, no petition for the withdrawal or cancellation of license has been filed per Certificate of Corporate Filing/Information issued by the SEC dated February 19, 2010. It is further represented that Resins is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at Unit 2104 Antel 2000 Corporate Center, 121 Valero Street, Salcedo Village, Makati City; that it is registered with the Board of Investments on a pioneer status per Certificate of Registration No. DP 94-124 issued on May 20, 1994; that as of March 4, 2009, the following are the stockholders of record of Resins : Name Nationality No. of Shares Amount Percentage Subscribed Paid-Up Mitsubishi Corporation Japanese 14,479,999 P144,799,990.00 19.999% Tosoh Corporation Japanese 57,919,996 P579,199,960.00 80.00% Tomoyuki Koike Japanese 1 10.00 0.0002% Takeshi Hagiwara Japanese 1 10.00 0.0002% Toshihisa Tomii Japanese 1 10.00 0.0002% Yoshihiko Abe Japanese 1 10.00 0.0002% Barbara Anne C. Filipino 1 10.00 0.0002% Migallos 72,400,000 724,000,000.00 Treasury shares 14,430,000 144,300,000.00 that during the regular meeting of the Board of Directors of Resins held on March 19, 2009 a resolution was approved declaring cash dividends at P2.00 per share to total outstanding common shares of 72,400.00 as of February 28, 2009; that total dividends of P115,840,000.00 shall be payable to Tosoh , and P28,960,000.00 shall be payable to Mitsubishi on March 27, 2009; that as of September 26, 2008, six (6) months immediately preceding the payment of dividends, Tosoh and Mitsubishi owned 57,919,996 and 14,479,999 common shares, respectively. It is finally represented that Mitsubishi Manila Branch has no investments in Resin and does not own shares of stock in Resins as shown in the latter's latest audited financial statements; that Mitsubishi Manila Branch neither use nor hold for use in the conduct of its trade or business any shares of stock in Resins ; that Mitsubishi acquired the Resins shares but the said acquisition was made directly by Mitsubishi without the participation of Mitsubishi Manila Branch ; that all gains inured to the sole benefit of Mitsubishi and no gain whatsoever was received by Mitsubishi Manila Branch ; that Mitsubishi Manila Branch is not a material factor in the realization of dividends paid by Resins to Mitsubishi , as evidenced by the sworn Affidavit executed by the Treasurer of Mitsubishi Manila Branch dated February 5, 2010; and that, finally, 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 (Tax Code) of 1997, as amended. It provides: IDTcHa "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 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" 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 percent of the gross amount of dividends if the latter holds at least 25 percent 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, 25 percent preferential tax rate on gross amount of dividends shall apply. DaHISE However, 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 (hereinafter referred to as the "Amending Protocol" ), 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: "(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." Based on the above provision of the Amending Protocol, the shareholding requirement to avail of the 10 percent preferential tax rate was reduced from 25 percent to 10 percent. Considering that as of September 26, 2008, which is six (6) months immediately preceding the date of actual payment of the cash dividends on March 27, 2009, Tosoh and Mitsubishi respectively own 57,919,996 and 14,479,999 shares in Resins which are 80% and 19.99%, respectively, the dividends paid to Tosoh and Mitsubishi are subject to 10 percent preferential tax rate pursuant to Article 10 of the Philippines-Japan tax treaty, as amended. Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents. (G.R. No. 76573 dated September 14, 1989), it was 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 is 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 Resins to Mitsubishi shall be considered as income of Mitsubishi as ruled in the aforecited case of Marubeni vs. CIR (G.R. No. 76573). In view thereof, since Mitsubishi holds directly 19.99% and Tosho 80% of the outstanding and voting shares of Resins for a period of six months prior to the declaration of dividends, said dividends paid by Resins to Mitsubishi and Tosho are subject to preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD-059-10 dated November 3, 2010; BIR Ruling No. ITAD-060-10 dated November 3, 2010; BIR Ruling No. DA-ITAD-069-10 dated June 25, 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. DCTHaS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue