ITAD BIR Ruling No. 023-15

March 20, 2015 ITAD BIR RULING NO. 023-15 Article 10, Philippines-Japan tax treaty, as amended Fujitsu Ten Solutions Philippines, Inc. 24th-25th Floor, Hanson Square Building 17 San Miguel Avenue, Ortigas Center Pasig City 1605 Attention: Vernon Valones Department Manager-Corporate Services Gentlemen : This refers to your tax treaty relief application filed on August 23, 2012, requesting confirmation that dividends paid by Fujitsu Ten Solutions Philippines Inc. ("Fujitsu Ten-Phil.") to Fujitsu Ten Limited ("Fujitsu-Japan") are subject to preferential rate of 10 percent pursuant to Article 10 of the amended Convention between the Republic of the Philippines and the Government of 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") . It is represented that Fujitsu-Japan , with address at 2-28, Gosho-dori, 1-chome Hyogo-ku, Kobe, Hyogo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Certificate of Residence issued by the District Director of Hyogo Tax Office dated June 8, 2012; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated July 31, 2012; and that, on the other hand, Fujitsu Ten-Phil. is a corporation organized and existing under the laws of the Philippines, with principal address at 24th-25th Floor, Hanson Square Building, 17 San Miguel Avenue, Ortigas Center, Pasig City 1605. It is further represented, based on the Secretary's Certificate issued by Fujitsu Ten-Phil. dated August 14, 2012, that at the meeting of the Board of Directors of Fujitsu Ten-Phil. held on July 20, 2012, the Board of Directors of Fujitsu Ten-Phil. declared cash dividends of Five Hundred Six Thousand Six Hundred Nine Pesos (P506,609.00) , out of the unappropriated retained earnings of Fujitsu Ten-Phil. amounting to One Hundred Thirty-Five Million Two Hundred Nineteen Thousand Three Hundred Twenty-Six Pesos & 81/100 (P135,219,326.81) as of March 31, 2012 based on its audited financial statements, to be distributed on or before August 31, 2012; that since August 10, 1999, Fujitsu-Japan is the registered owner of 240,000 common shares [inclusive of nine (9) qualifying shares held in trust by the nine (9) members of the Board of Directors, with a par value of P100.00 per share], with a total value of P24,000,000.00, and which represents 80% of the total subscribed and paid-up capital stock of Fujitsu Ten-Phil. ; and that, based on bank telegraphic transfer from the Bank of the Philippine Islands, such dividends were remitted by Fujitsu Ten-Phil. to Fujitsu-Japan on August 29, 2012. It is finally represented that the issue or transaction subject of this 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 judicial appeal per Sworn Statement issued by Fujitsu Ten-Phil. dated August 23, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies, in general, to dividends received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." DCTHaS 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." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, 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 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 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. xxx xxx xxx 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. 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. Based on the aforequoted 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 of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, since Fujitsu-Japan is a resident of Japan with no fixed place of business in the Philippines which holds 80 percent of common and voting shares in Fujitsu Ten-Phil. for more than six months immediately preceding the date of payment of the dividend or since August 10, 1999, this Office is of the opinion and so holds that such dividends paid by Fujitsu Ten-Phil. to Fujitsu-Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. aIAEcD 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