ITAD BIR Ruling No. 019-16

March 15, 2016 ITAD BIR RULING NO. 019-16 Article 10 (Dividends), Philippines-Japan tax treaty SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Lucil Q. Vicerra Principal, Tax and Customs Services Gentlemen : This refers to your tax treaty application ("TTRA") filed on August 6, 2014, requesting confirmation that dividends paid by JAE Philippines, Inc. ("JAEPI") to Japan Aviation Electronics Industry, Ltd. ("JAEIL") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by the 2009 Protocol ("Philippines-Japan tax treaty"). It is represented that JAEIL is a foreign corporation organized and existing under the laws of Japan and is a resident thereof within the meaning of Article 4 of the Convention between the Philippines and Japan on the avoidance of double taxation; that it is not registered as a corporation or a partnership in the Philippines per SEC certification issued on August 15, 2014; and that on the other hand, JAEPI is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented that JAEIL is the registered owner of One Hundred Forty Thousand (140,000) common shares inclusive of Five (5) nominal shares with a par value of Php1,000 per share constituting One Hundred percent (100%) of the issued and outstanding shares in JAEPI. It is also represented that on June 26, 2014, the board of directors of JAEPI has declared cash dividend in the total amount of US$6,897,800.00 to all stockholders of records as of June 26, 2014 to be paid on or before August 15, 2014. It is also represented, per sworn certification issued by the President of JAEPI dated July 24, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to JAEIL are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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: n 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, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 1, 2, & 3 of 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; 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 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 the dividends, shall not exceed 10 per cent of the gross amount of the dividends. . ." Under paragraphs 2 and 3 of 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 (a) 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 during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, the dividend paid by JAEPI to JAEIL is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) JAEIL holds 140,000 common shares constituting 100 percent of the total shares of JAEPI, which is more than ten percent (10%) of the capital of the said company and (2) JAEIL holds the said shares during the period of more than 6 months immediately preceding the date of payment of the dividends on August 18, 2014 or since December 31, 2001. 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. ASEcHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.