ITAD BIR Ruling No. 026-15

March 23, 2015 ITAD BIR RULING NO. 026-15 Article 10, Philippines-Japan Tax Treaty, as amended International Elevator & Equipment, Inc. Km. 23 West Service Road SSH Cupang, Muntinlupa City Attention: Mr. Ramoncito A. Ocampo President Gentlemen : This refers to your Tax Treaty Relief Application filed on August 14, 2013, on behalf of Mitsubishi Electric Building Techno-Service Co. Ltd. ("MEBTS") , requesting that dividend paid by International Elevator & Equipment, Inc. ("IEEI") to MEBTS 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 ("Philippines-Japan tax treaty, as amended") . It is represented that MEBTS, with address at 1-7 Yurakucho, Chiyoda-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Resident Certificate issued by the District Director of Kojumachi Tax Office on June 21, 2013; that MEBTS 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 Securities and Exchange Commission dated August 5, 2013; and that IEEI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Km. 23 West Service Road, SSH Cupang, Muntinlupa City. It is also represented, that on July 24, 2013 the Board of Directors of IEEI approved the declaration of cash dividend in favor of the stockholders of IEEI amounting Php450,000,000.00 to the stockholders of record as of March 31, 2013 to be distributed according to their respective shareholdings as of March 31, 2013; that per Secretary's Certificate issued on August 12, 2013 by IEEI, as of March 31, 2013, MEBTS owns 44,999,999 common shares with a total par value of Php44,999,999.00, representing 14.99% of the total shareholding of IEEI; and that these shares were acquired by MEBTS on various dates from May 5, 1999 to December 11, 2007 through transfers from various shareholders and stock dividend. 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 Affidavit issued by IEEI dated August 14, 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. (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 n (b) 15 per cent of the gross amount of the dividends in all other cases. SaIHDA 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. 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. This being the case, inasmuch as MEBTS is a resident of Japan with no fixed place of business in the Philippines, and holds directly 14.99% of the outstanding capital stock of IEEI (which in fact exceeds the minimum required percentage of holding of 10 percent), and since MEBTS maintains such holdings since December 2007, and, in effect, more than six months immediately preceding the date of payment of the dividends, such dividends paid by IEEI to MEBTS are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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 n Note from the Publisher: Copied verbatim from the official copy. Succeeding phrase should read as "company during the period of six months immediately preceding the date of payment of the dividends".