ITAD BIR Ruling No. 012-15

January 23, 2015 ITAD BIR RULING NO. 012-15 Article 10, Philippines-Japan Tax Treaty, as amended Asia Pacific Business Legal Consulting 2nd Floor Bldg. B. Mactan Marina Mall Ibo, Lapulapu City, Cebu Attention: Ms. Emery Joy T. Sanchez Partner Gentlemen : This refers to your tax treaty relief application filed on August 7, 2014 requesting for confirmation of your opinion that the dividend received by NEC COMMUNICATION SYSTEMS, LTD. (NEC) from NEC TELECOM SOFTWARE PHILIPPINES, INC. (NEC-PHILIPPINES) is subject to 10 percent preferential tax rate 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 ("Philippines-Japan tax treaty") , as amended by a Protocol 1 effective January 1, 2009. It is represented that NEC is a foreign corporation and a resident of Japan, as evidenced by its Articles of Incorporation and Residence Certificate issued by the Shiba Tax Office, Japan on June 13, 2014; that NEC is located at 4-28, Mita 1-Chome, Minato-ku, Tokyo, Japan; that NEC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by Securities and Exchange Commission ("SEC") on July 2, 2014; and that, on the other hand, NEC-PHILIPPINES is registered Ecozone Export Enterprise with the Philippine Economic Zone Authority under Certificate of Registration No. 01-003-IT dated May 17, 2001 and is situated at 7th Floor, e-Bloc 2, Cebu IT Park, Apas, Cebu City, Cebu, Philippines. It is further represented that the Board of Directors of NEC-PHILIPPINES, at its meeting on August 1, 2014, declared cash dividend amounting to P10,000,000.00 from its accumulated and unrestricted retained earnings as of fiscal year ending March 31, 2014 to all stockholders of record as of March 31, 2014 and payable on August 29, 2014, based on the Secretary's Certificate issued by the Corporate Secretary of NEC-PHILIPPINES on August 1, 2014; and that NEC is a stockholder of record of 25,993 common shares as of May 13, 2014 constituting 99.97 percent of the total stockholding of NEC-PHILIPPINES, purchased on February 28, 2003. It is finally represented that the dividend subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Affidavit issued by the President of NEC-PHILIPPINES on August 1, 2014. DCESaI In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides that dividend paid to NEC, being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 30 percent, thus: "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 interests, 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividend may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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 this connection, paragraphs 1, 2, 3 and 5, Article 10 of the Philippines-Japan tax treaty, as amended, provide: "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: IAEcCa 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. 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. xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Based on the aforequoted provisions, dividends arising in the Philippines paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed, beginning January 1, 2009: (a) 10 percent of the gross amount of dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent of the gross amount of the dividends if the domestic company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that NEC holds directly 99.97 percent of the total shares of stock of NEC-PHILIPPINES during the period of six months immediately preceding the date of payment of the dividend or since February 28, 2003, such dividend paid by NEC-PHILIPPINES to NEC is subject to income tax at the reduced 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. SDHAEC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner 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.