ITAD BIR Ruling No. 025-11

January 26, 2011 ITAD BIR RULING NO. 025-11 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 87-83; BIR Ruling No. ITAD-20-99; BIR Ruling No. ITAD-8-99; BIR Ruling No. ITAD-47-99; BIR Ruling No. ITAD-41-99 Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Balikid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Legal Counsel Gentlemen : This refers to your letter dated August 14, 2009, on behalf of MAKOTO LIGHT METAL CO., LTD. (hereinafter referred to as "MLM"), requesting for a ruling confirming that the cash dividends received by MLM from PHILIPPINE MAKOTO CORPORATION (hereinafter referred to as "PMC") are subject to the 10 percent withholding tax pursuant to Article 10 (2) (a) of 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 (hereinafter referred to as the "Philippines-Japan tax treaty" ). DIEcHa It is represented that MLM, founded on March 1969 and with address at 3-13-56 Kamimuneoka Shiki City, Saitama, is a resident of Japan and subject to taxation in Japan under Tax ID No. 00602981, per certification by the District Director of Asaka Tax Office, Tokyo dated August 26, 2009; that MLM is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission (SEC) dated August 26, 2009; that PMC, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal office at 4th St., 3rd Avenue, MEPZ I, Lapulapu City, Cebu; that it is duly registered with the Export Processing Zone Authority (EPZA) [now Philippine Economic Zone Authority (PEZA)] with Certificate of Registration No. 93-47 dated October 1, 1993; that PMC has a total subscribed and paid-up common shares of 750,000 at P100.00 par value equivalent to the amount of P75,000,000.00; that out of the said total subscribed and paid-up shares of PMC, MLM has subscribed and paid-up common shares of 749,995 equivalent to P74,999,500.00, as shown in the certified true copy of the General Information Sheet of PMC for the year 2008 filed with the SEC on October 2, 2008. It is further represented that during a special meeting of the Board of Directors of PMC on February 17, 2009 , it was resolved that an amount of JPY11,583,012.00 be declared as cash dividends to be taken out of the accumulated unrestricted and unappropriated retained earnings or surplus profit of PMC as of fiscal year ended June 30, 2008, in favor of stockholders of record as of the same date, per certified copy of the Board Resolution dated February 17, 2009; that in another special meeting of the same Board of Directors on June 23, 2009 , another resolution was made declaring an additional amount of JPY15,000,000.00 as cash dividends to be taken out of the accumulated unrestricted and unappropriated retained earnings or surplus profit of the PMC as of fiscal year ended June 30, 2008 in favor of the stockholders of record as of the same date, per certified copy of the Board Resolution dated June 23, 2009; that, as certified by the Corporate Secretary of PMC on August 11, 2009, MLM owns at least 25 percent of the outstanding shares of the voting stock of PMC as well as of the total shares issued by PMC during the period of six (6) months immediately preceding the dates of payments and declarations of dividends; and that, as further certified by the Corporate Secretary of PMC on January 22, 2010, the cash dividends declared on February 17, 2009 in the amount of JPY11,583,021.00, and on June 23, 2009 in the amount of JPY15,000,000.00, both for the fiscal year ended June 30, 2008 in favor of MLM were paid and remitted to the latter on March 3, 2009 and June 25, 2009, respectively. It is finally represented, per certification by the Corporate Secretary of PMC dated August 11, 2009, 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : "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 . . . 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 NIRC of 1997, as amended, provides, viz. : "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. cHEATI xxx xxx xxx" In accordance with the foregoing, Article 10 of the Philippines-Japan tax treaty may apply to the subject request for ruling. It provides, viz. : "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 25 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) 25 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 provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent of the gross amount of dividends if the latter holds at least 25 percent either of the voting shares or of the total shares rendered during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25 percent preferential tax rate shall apply. In relation thereto, a 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 took effect on January 1, 2009, Article III of which reads as follows: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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; aAcDSC (b) 15 per cent of the gross amount of the dividends in all other cases." Pursuant to the above Protocol, the 25 percent shareholding requirement under Article 10 (2) of the Philippines-Japan tax treaty was reduced to 10 percent. Moreover, the 25 percent preferential tax rate which applies in all other cases was reduced to 15 percent. In view thereof and considering the representation that during the period of 6 months immediately preceding the dates of payment of the dividends on March 3, 2009 and June 25, 2009, MLM owns at least 10 percent of the outstanding shares of the voting stock of PMC, the cash dividends paid to MLM by PMC are subject to the 10 percent preferential tax rate, pursuant to the 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