ITAD BIR Ruling No. 027-10

August 27, 2010 ITAD BIR RULING NO. 027-10 Article 10, Philippines-Japan tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 087-83; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Masuda Philippines, Inc. 108 North Science Avenue Laguna Technopark Bian, Laguna, Philippines Attention: Atty. Maria Virna G. Antonio-Salvador Asst. Vice-President for General Affairs Gentlemen : This refers to your letter dated September 2, 2006 applying for tax relief on the dividends paid by Masuda Philippines, Inc. (Masuda) to MSD Company Ltd. of Japan (MSD) , pursuant to the Philippines-Japan tax treaty. It is represented that MSD is a Japanese corporation with address at 1500 Watagashima, Tenryu-Ku, Hamamatsu-Shi, Shizuoka-Ken, Japan and accordingly, is subjected to the Japanese corporate taxation, pursuant to a Certificate of the Japanese Fiscal Authorities dated July 25, 2007; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated July 25, 2006; that Masuda is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 108 North Science Avenue, Laguna Technopark, Bian, Laguna; that it is engaged in the manufacture of motorcycle parts and is a Philippine Economic Zone Authority (PEZA)-registered export enterprise under Registration Certificate No. 93-66 dated December 26, 1993 issued by the PEZA. It is also represented that as of March 31, 2006 MSD has Ninety-Nine Thousand Nine Hundred Ninety-Five (99,995) subscribed shares, amounting to Ninety-Nine Million Nine Hundred Ninety Five Thousand Pesos (PhP99,995,000.00) paid up and which constitute 99.995% of the total outstanding stocks of Masuda per Certificate issued by Maria Virna G. Antonio-Salvador, Assistant Corporate Secretary of Masuda dated November 20, 2006; that on June 14, 2006, Masuda's Board of Directors declared cash dividends amounting to Fifteen Million Pesos (PhP15,000,000.00) out of Masuda's retained earnings as of March 31, 2006 to all stockholders of record as of March 31, 2006 in proportion to their respective stockholdings as of such date, payable on or before December 31, 2006; that said dividends were paid on October 10, 2006, as shown in the Certification issued by the Assistant Corporate Secretary of Masuda dated October 20, 2008; that pursuant to the same Certification, MSD owns 99.995% of the total outstanding shares of Masuda during the period of six (6) months immediately preceding the date of actual payment of dividends (October 10, 2006); and that the issue/s or transaction subject of the above request for ruling is not under investigation, neither it is subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. CHATEa 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. 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, . . .: 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" In this particular case, the treaty involved is the Philippines-Japan tax treaty which, in its Article 10, provides as follows, 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. 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. xxx xxx xxx" Based on the aforequoted provisions, 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 of the Philippine Company during the period of 6 months immediately preceding the date of payment of the dividends. In all other cases, the 25 percent preferential tax rate on gross dividends shall apply. AaCEDS Considering that MSD holds 99.995% of the total outstanding shares of Masuda, during the period of 6 months immediately preceding the date of the actual payment of the cash dividend on October 10, 2006, this Office is of the opinion and so holds that the dividend payments to MSD by Masuda, in the amount of PhP15,000,000.00 are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD-008-99 dated July 20, 1999; BIR Ruling No. ITAD-020-99 dated August 18, 1999; BIR Ruling No. ITAD-041-99 dated November 3, 1999; and BIR Ruling No. ITAD-047-99 dated December 9, 1999.) This ruling is issued based on 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. TaCDAH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue