ITAD BIR Ruling No. 020-13

February 1, 2013 ITAD BIR RULING NO. 020-13 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 Transnational Diversified Corporation The Penthouse, Net Quad Building 4th Avenue corner 30th Street E-Square Crescent Park West Bonifacio Global City, Taguig Attention: Millicent L. Sim-Asuncion Chief Legal Counsel & Corporate Secretary Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 8, 2011 requesting confirmation that the dividends paid by NYK Logistics (Philippines), Inc. ("NYK") to Nippon Yusen Kabushiki Kaisha ("Nippon Yusen") are subject to the preferential tax rate of 10 percent pursuant to the amended 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 1 ("Philippines-Japan tax treaty, as amended") . It is represented that Nippon Yusen is a foreign corporation organized and existing under the laws of Japan with principal office at 3-2, Marunouchi, 2-Chome, Chiyoda-ku, Tokyo, Japan based on the Certification of Residence issued by the District Director of Kojimachi Tax Office dated May 27, 2011; that Nippon Yusen is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 10, 2011; that, on the other hand, NYK is a corporation duly organized and existing under the laws of the Philippines with office address Ground Floor TDG-NYK Harbor Center Building I corner 23rd and 24th Streets, Port Area, Manila, Philippines. It is further represented that on May 27, 2011, majority of the Board of Directors and Stockholders owning at least two-third (2/3) of the outstanding capital stock of NYK approved Resolution No. 2011-05-02 which declared cash dividends in the amount of Php37,588,410.00 out of the corporation's adjusted unappropriated retained earnings as of March 31, 2011 in favor of the Corporation's stockholders of record as of March 31, 2011, payable on July 15, 2011; that Nippon Yusen holds 510,000 common shares constituting 51 percent of the issued and outstanding shares of NYK; that Nippon Yusen directly holds at least 10 percent of the total shares issued by NYK within a 6-month period prior to the date of dividend declaration per Secretary's Certificate issued by the Corporate Secretary of NYK dated July 7, 2011; and that dividends, in the amount of USD408,579.35 were remitted by NYK to the account of Nippon Yusen in the Bank of Tokyo-Mitsubishi UFJ Ltd., Japan through the latter's Manila branch, on August 4, 2011, per the submitted proof of remittance on May 4, 2012. It is finally represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Corporate Secretary of NYK dated July 7, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, provides as follows: "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 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%)." However, under Section 32 (B) (5) of the Tax Code, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax or partially exempt, if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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" Hence, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "Article 10 DIVIDENDS 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 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. 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. xxx xxx xxx" Based on the above-quoted provisions, 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, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15 percent in all other cases. Accordingly, since Nippon Yusen holds directly 51 percent of the total shares of stock of NYK during the period of six months immediately preceding the date of payment of the dividends, such dividends paid by NYK to Nippon Yusen are subject to income tax at the rate of 10 percent of the gross amount thereof. ( BIR Ruling ITAD 007-10 dated May 20, 2010 ) This ruling is issued on the basis of the foregoing 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. The "Amending Protocol" to the Philippines-Japan tax treaty took effect on January 1, 2009.