ITAD BIR Ruling No. 025-13

February 12, 2013 ITAD BIR RULING NO. 025-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Fabian K. de los Santos Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 9, 2012, requesting confirmation that the dividends paid by Taiheiyo Cement Philippines, Inc. ("Taiheiyo-Phil") to Taiheiyo Cement Corporation ("Taiheiyo-Japan") are subject to a preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of 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 ("Philippines-Japan tax treaty, as amended") . aAHTDS It is represented that Taiheiyo-Japan , with address at 2-3-5, Daiba, Minato-ku, Tokyo, 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 the Certificate of Residence issued by the District Director of Shiba Tax Office dated January 27, 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 24, 2012; and that, on the other hand, Taiheiyo-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at 11th Floor, Insular Life Building, Cebu Business Park, Cebu City, Cebu 6000. It is further represented, that at the special meeting of the Board of Directors of Taiheiyo-Phil held on July 11, 2012, Taiheiyo-Phil approved the declaration of cash dividends amounting to Two Hundred Million Pesos (P200,000,000.00) to stockholders of record as of August 30, 2012, with payment date on or before September 30, 2012; that based on Secretary's Certificate issued by Taiheiyo-Phil dated July 30, 2012, through various subscription beginning May 2, 2003, Taiheiyo-Japan holds 7,000,000 redeemable preferred shares with a par value of P700,000,000.00 and 5,803,189 common shares with a total par value of P580,318,900.00 in Taiheiyo-Phil representing 100% ownership in Taiheiyo-Phil (including the five [5] shares held by its nominee stockholders); and that, per the Certification issued by Mizuho Corporate Bank, Ltd.-Manila Branch, an amount of $4,302,956.77 was remitted by Taiheiyo-Phil as dividend payment to Taiheiyo-Japan on September 7, 2012. It is finally represented, per Sworn Statement dated July 25, 2012 issued by Taiheiyo-Phil, that the issue or transaction subject of this request for 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (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 . (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%). 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 invoke, may apply to the instant case. It provides: cIECaS "Article 10 1. <p style="text-align: justify;text-indent: -45pt;margin-left: 54pt;margin-right: 9pt;"> <span style="font-size:12pt; color:#FF0000;">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 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." 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, considering that Taiheiyo-Japan holds 100 percent ownership in Taiheiyo-Phil, and that Taiheiyo-Japan maintains these shareholdings six months immediately preceding the date of payment of the dividends, such dividends to be paid by Taiheiyo-Phil to Taiheiyo-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. ( BIR Ruling No. ITAD-32-11 dated January 28, 2011 ) 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