ITAD BIR Ruling No. 013-15

January 23, 2015 ITAD BIR RULING NO. 013-15 Article 10, Philippines-Japan Tax Treaty, as amended Otsuka Philippines Pharmaceutical, Inc. 3F King's Court II Building Chino Roces Avenue, Makati City Attention: Mr. Jose Jacinto M. Aquino Associate Finance Director Gentlemen : This refers to your tax treaty relief application filed on June 27, 2014 requesting for confirmation of your opinion that the dividend received by OTSUKA PHARMACEUTICAL CO. LTD. (OTSUKA) from OTSUKA PHILIPPINES PHARMACEUTICAL, INC. (OTSUKA-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 OTSUKA is a foreign corporation and a resident of Japan, as evidenced by its Articles of Incorporation and Residence Certificate issued by the Kanda Tax Office, Japan on July 26, 2013; that OTSUKA is located at 2-9, Kanda Tsukasha-Cho, Choyoda-Ku, Tokyo, Japan; that per Certificate of Corporate Filing/Information issued on July 16, 2013 by the Securities and Exchange Commission ("SEC"), its license was cancelled by virtue of a Certificate of Cancellation of license to establish a regional or area headquarters in the Philippines issued on August 4, 1999; and that, on the other hand, OTSUKA-PHILIPPINES is a domestic corporation situated at 3F King's Court II Building, Chino Roces Avenue, Makati City, Philippines. It is further represented that the Board of Directors of OTSUKA-PHILIPPINES, at its meeting on May 13, 2014, declared cash dividend amounting to P10,000,000.00 from its retained earnings to all stockholders on record, based on the Secretary's Certificate issued by the Corporate Secretary of OTSUKA-PHILIPPINES on May 23, 2014; and that OTSUKA is a stockholder of record of 49,994 common shares exclusive of six (6) shares held by its nominees as of May 13, 2014, acquired through original subscription on December 17, 1997, constituting 99.996 percent of OTSUKA-PHILIPPINES' issued and outstanding shares. 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 Associate Finance Director of OTSUKA-PHILIPPINES on June 24, 2014. ITADaE 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 OTSUKA, 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: DSAEIT 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 OTSUKA holds directly 99.996 percent of the total shares of stock of OTSUKA-PHILIPPINES during the period of six months immediately preceding the date of payment of the dividend or since December 17, 1997, such dividend paid by OTSUKA-PHILIPPINES to OTSUKA 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. cEaCAH 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.