ITAD BIR Ruling No. 021-15

March 20, 2015 ITAD BIR RULING NO. 021-15 Article 10, Philippines-Japan Tax Treaty Kansai Paint Philippines, Inc. C2-9 Carmelray Industrial Park 2 Barangay Punta, Calamba Laguna Attention: Mr. Norio Kishimoto President and General Manager Gentlemen : This refers to your tax treaty, relief application filed on July 3, 2012, requesting confirmation that the dividend paid by Kansai Paint Philippines, Inc. ("Kansai Phils.") to Kansai Paint Company Ltd. ("Kansai Japan") , is subject to the 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 Facts It is represented that Kansai Japan is a corporation duly organized and existing under the laws of Japan and is a resident thereof for tax purposes, with office address at 33-1, Kanzaki-cho, Amagasaki City, Hyogo Pref., Japan, per Certificate of Residence issued by the Amagasaki Tax Office of Japan; that Kansai Japan is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 25, 2013; and that on the other hand, Kansai Phils. is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office and principal place of business at C-9 Carmelray Industrial Park II, Barangay Punta, Calamba City, Laguna, Philippines. It is further represented that, on May 31, 2013, the Board of Directors of Kansai Phils. declare cash dividends amounting to P1,600,000.00 to stockholders of records as of May 31, 2013, in proportion to their respective stockholdings and shall be payable on June 30, 2013; that the following are the stockholdings of Kansai Japan to Kansai Phils. : Type of Number Par Value Mode of Date of Percentage of Shares of Shares Acquisition Acquisition Ownership Common 7,995.00 P1,000.00 Subscription January 21, 2010 99.99% Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to Kansai Japan , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: TCIHSa "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 dividends 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" For this purpose, you invoke the Philippines-Japan tax treaty, as amended, provides as follows: "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." xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. Accordingly, considering that Kansai Japan holds directly 99.99 percent of the total shares of stock of Kansai Phils. during the period of six months immediately preceding the date of payment of the dividends or since January 21, 2010, such dividends paid by Kansai Phils. to Kansai Japan are 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 . 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.