ITAD BIR Ruling No. 022-15

March 20, 2015 ITAD BIR RULING NO. 022-15 Article 10, Philippines-Japan Tax Treaty, as amended Platon Martinez Flores San Pedro Leao LAW OFFICES 6th Floor, Tuscan Building 114 V.A. Rufino Street Legaspi Village 1229 Makati City Attention: Atty. Mia Carissa C. Martin Atty. Lucky Angelo T. Aranas Gentlemen : This refers to your Tax Treaty Relief Application filed on July 26, 2013, on behalf of The Yokohama Rubber Company Ltd. ("Yokohama Rubber") , requesting confirmation that the dividends paid by Yokohama Tire Sales Philippines, Inc. ("Yokohama Sales") to Yokohama Rubber are subject to the 10 percent preferential tax rate 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 , as amended by Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that Yokohama Rubber , with address at 36-11, Shimbashi, 5-chome, Minato-ku, Tokyo 105-8685, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Status of Taxable Person issued by the District Director of Shiba Tax Office on June 14, 2013; that Yokohama Rubber is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 31, 2013; and that Yokohama Sales , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Unit A2, First Midland Bldg., 109 Gamboa Street, Legaspi Village, Makati City. It is also represented, that during the meeting of the Board of Directors of Yokohama Sales on July 8, 2013, they approved a resolution declaring 15% cash dividends to all stockholders of record as of June 30, 2013 worth Thirteen Million Pesos (Php13,000,000.00), payable in cash within a reasonable period; that per Secretary's Certificate dated July 24, 2014, Yokohama Rubber owns 866,055 shares with a total par value of Php86,605,500.00, representing 99.99% of the total outstanding capital stock of Yokohama Sales acquired by Yokohama Rubber on various dates from the incorporation of Yokohama Sales until July 22, 2011. Finally, it is represented that the transaction subject of the herein request for ruling is not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per the Sworn Statement issued by Yokohama Sales dated July 25, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. aTcIEH (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 . . . dividends, rents, royalties . . .: 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 Tax Code of 1997, as amended, provides: "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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked 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 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 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. 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. HaIESC xxx xxx xxx" Based on the foregoing, 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 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. Considering that Yokohama Rubber is a resident of Japan with no fixed place of business in the Philippines, and holds 866,055 shares representing 99.99% of the total outstanding capital stock of Yokohama Sales acquired on various dates from the incorporation of Yokohama Sales to July 22, 2011 which is more than six months immediately preceding the date of payment, this Office is of the opinion and so holds that the dividends paid by Yokohama Sales to Yokohama Rubber are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (a) 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.