ITAD BIR Ruling No. 015-10

August 4, 2010 ITAD BIR RULING NO. 015-10 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. 087-83; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Atty. Rolando P. Nonato Room 406 Tulips Center A.S. Fortuna Street, Bakilid Mandaue City, Cebu City Attention: Rolando P. Nonato Legal Counsel of Cebu Iwakami Corporation Gentlemen : This refers to your letter dated April 18, 2008, on behalf of Iwakami Co., Ltd. ("ICL") , requesting confirmation that the cash dividends received from Cebu Iwakami Corporation ("CIC") are subject to 10 percent withholding tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. TAaHIE It is represented that ICL is a corporation organized and existing under the laws of Japan, with principal address at 2-4-9 Takara-machi Katsushika-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 25, 2008; that CIC is registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise, with principal address at 6th Street, Block B-6, Mactan Ecozone I, Lapu-lapu City. It is further represented that on October 29, 2007, the Board of Directors of CIC resolved that, the amount of P6,252,957.00 be declared as cash dividends to be taken out of the unrestricted retained earnings or surplus profit of the corporation as of fiscal year ending July 31, 2007, in favor of the stockholders of record as of July 31, 2007; that per Secretary's Certificate issued by CIC dated November 25, 2009, ICL holds 35.15% of the shares of CIC, six months prior to the date of payment of the dividends which was on November 28, 2007; that per Sworn Statement issued by CIC dated April 3, 2008, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, 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 income received by a nonresident foreign corporation, which provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." AHCcET However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, 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. (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. DTSaIc 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, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the voting shares or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends, or if the dividends are paid by a company who is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment. Such being the case, and considering that during the six-month period prior to the actual date of payment of the dividends, ICL held 35.15% of the total shares of stock of CIC, this Office is of the opinion, and so holds that the dividend payments by CIC to ICL is subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (ITAD Ruling No. 008-99 dated July 20, 1999; ITAD Ruling No. 020-99 dated August 18, 1999; BIR Ruling No. 087-83 dated May 17, 1983; ITAD Ruling No. 041-99 dated November 3, 1999; ITAD Ruling No. 047-99 dated December 9, 1999) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue