ITAD BIR Ruling No. 028-10

August 27, 2010 ITAD BIR RULING NO. 028-10 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 Mitsuba Manufacturing Philippines Corporation Lot 1 & 2, Block 8, Phase II, FCIE, Brgy. Langkaan, Dasmarias, Cavite Attention: Marlene L. Besa AM-Accounting and Finance Gentlemen : This refers to your letter dated July 3, 2006 requesting confirmation that the dividend payments of Mitsuba Manufacturing Philippines Corporation (Mitsuba Philippines) to Mitsuba Corporation-Japan (Mitsuba Japan) are subject to the ten percent (10%) preferential tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Mitsuba Japan is a nonresident foreign corporation with address at 1-2681 Hirosawa, Kiryu, Gunma, Japan and is registered as a taxable person under Tax Reference Number 620157 per Certificate of Status of Taxable Person issued by the District Director of Tax Office on June 2, 2006; that is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 13, 2006; that Mitsuba Philippines is a corporation organized and existing under the laws of the Philippines with office address at Lot 1 & 2 Block 8, Phase II, FCIE Langkaan, Dasmarias, Cavite, Philippines. It is further represented that from January 2003 to May 29, 2005, Mitsuba Japan has Five Hundred Twenty-Three Thousand Two Hundred Twenty (523,220) shares with a par value of PhP100.00 per share and an aggregate value of Fifty-Two Million Three Hundred Twenty-Two Thousand Pesos (PhP52,322,000.00), representing 33.33% of the total shares of Mitsuba Philippines as shown in the certification issued by the Corporate Secretary of Mitsuba Philippines dated February 19, 2008; and that on April 25, 2003, April 23, 2004, April 25, 2005 and April 25, 2006 the Board of Directors of Mitsuba Philippines declared cash dividends as follows: ECcTaH 1) Forty-Six Million Ninety-Seven Thousand Four Hundred Twenty Pesos (PhP46,097,420.00) out of the retained earnings of Mitsuba Manufacturing Philippines as of December 31, 2002, paid on July 1, 2003 to stockholders of record as of December 31, 2002; 2) Forty-Six Million Ninety-Seven Thousand Four Hundred Twenty Pesos (PhP46,097,420.00) out of the retained earnings of Mitsuba Manufacturing Philippines as of December 31, 2003, paid on July 1, 2004 to stockholders of record as of December 31, 2003; 3) Forty-Six Million Ninety-Seven Thousand Four Hundred Twenty Pesos (PhP46,097,420.00) out of the retained earnings of Mitsuba Manufacturing Philippines as of December 31, 2004, paid on June 1, 2005 to stockholders of record as of December 31, 2004; and 4) Forty-Six Million Ninety-Seven Thousand Four Hundred Twenty Pesos (PhP46,097,420.00) out of the retained earnings of Mitsuba Manufacturing Philippines as of December 31, 2005, paid on May 29, 2006 to stockholders of record as of May 31, 2006; and that the issue/s or transaction subject of the above 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 taxpayer/s involved. 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%). IHaECA 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% of the gross amount of dividends if the latter holds at least twenty-five percent (25%) either of the voting shares or of the total shares of the Philippine Company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. EIAaDC Such being the case, and considering that Mitsuba Japan holds 33.33% of the total shares of stock of Mitsuba Philippines during the period of 6 months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the dividend payments by Mitsuba Philippines to Mitsuba Japan shall be subject to a preferential tax rate of 10%, based on the gross amount thereof, 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 on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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