ITAD BIR Ruling No. 017-15

March 20, 2015 ITAD BIR RULING NO. 017-15 Article 10, Philippines-Japan tax treaty, as amended Daiwa Seiko Philippines Corporation Block 5, Lots 8 & 9, LIIP Mamplasan Bian, Laguna Attention: Hidemasa Komoto Senior Executive Vice President Gentlemen : This refers to your tax treaty relief application filed on August 30, 2013 requesting confirmation that the dividends paid by Daiwa Seiko Philippines Corporation ("Daiwa Seiko Philippines ") to Daiwa Seiko Co. Ltd. (" Daiwa Seiko Japan ") are subject to a preferential rate of 10 percent 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that Daiwa Seiko Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Incorporation and Residence Certificate issued by the Higashiosaka Tax Office on June 19, 2013; that Daiwa Seiko Japan is located at 2-2-27, Muzuhai, Higashiosaka-Shi, Osaka, Japan; that it is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 28, 2013; and that, on the other hand, Daiwa Seiko Philippines is a domestic corporation with office address at Block 5, Lots 8 & 9, LIIP Mamplasan, Bian, Laguna, Philippines. It is further represented based on the Secretary's Certificate issued on July 31, 2013, that the Board of Directors of Daiwa Seiko Philippines , at the annual meeting on July 25, 2013, has determined that it is in the best interest of Daiwa Seiko Philippines to pay cash dividend amounting to P8.00 per share to all holders of record of all the issued and outstanding shares of common stock as of March 31, 2013, and payable on September 15, 2013; that as of record date on March 31, 2013, Daiwa Seiko Philippines holds 99.99 percent of the total issued and outstanding shares of stock issued by Daiwa Seiko Philippines as described below: Stockholder Number and Mode of Acquisition Percentage of Value of Shares Acquisition Date Ownership Daiwa Seiko 2,999,973 Original December 31, 99.99 percent Japan (P23,999,784.00) Issuance 2004 It is further represented based on the Certification issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch 2 on December 18, 2013, Daiwa Seiko Philippines remitted such dividends to Daiwa Seiko Japan as follows: Date of Remittance Amount September 25, 2013 55,093,584.00 In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: AHCETa "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof 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: 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; aATHES b) 15 per cent of the gross amount of the dividends in all other cases. 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." Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent 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 for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Accordingly, since Daiwa Seiko Japan holds directly at least 10 percent of the total shares of Daiwa Seiko Philippines during a period of six months immediately preceding the date of payment of the dividends on September 25, 2013, where Daiwa Seiko Japan actually holds 99.99 percent of these shares since December 31, 2004 , such dividends paid by Daiwa Seiko Philippines to Daiwa Seiko Japan are subject to income tax at the rate of 10 percent , 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. 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 effective January 1, 2009. 2. Located at 15th Floor 6788 Ayala Avenue, Makati City 1226, Philippines.