ITAD BIR Ruling No. 029-11

January 28, 2011 ITAD BIR RULING NO. 029-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-68-10 Fujitsu Ten Corporation of the Philippines 100 South Science Avenue Laguna Technopark Don Jose Sta. Rosa, Laguna Attention: Yukimi Muramatsu President Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on December 21, 2010, requesting confirmation that the dividends paid by Fujitsu Ten Corporation of the Philippines ("Fujitsu-Phil") to Fujitsu Ten (Singapore) Pte. Ltd. ("Fujitsu-Singapore") are subject to final withholding tax at the preferential rate of 15 percent of the gross amount of dividends, pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that Fujitsu-Singapore is a corporation organized and existing under the laws of Singapore and is a resident of Singapore with principal address at 138 Robinson Rd #17-00 Singapore 068906 based on the Certificate of Residence issued by Ms. Chiam Yah Fang, Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated November 25, 2010; 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 December 6, 2010; and that, on the other hand, Fujitsu-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 100 South Science Avenue, Laguna Technopark, Don Jose Sta. Rosa, Laguna. It is further represented, based on the Secretary's Certificate issued by Fujitsu-Phil dated December 20, 2010, that as of October 22, 2010, Fujitsu-Singapore is the beneficial owner of 325,000 common shares with a par value of PhP100.00 per share or an aggregate amount of PhP32,500,000.00 which constitute 25% of the total subscribed and paid up capital stock of Fujitsu-Phil; that at the meeting held on October 22, 2010, the Board of Directors of Fujitsu-Phil passed a resolution declaring a cash dividend amounting to Two Million Five Hundred Thousand US Dollars (US$2,500,000.00), out of the unappropriated retained earnings of Nineteen Million Eight Hundred Thirty Thousand One Hundred Nineteen US Dollars (US$19,830,119.00), as of September 30, 2010 of Fujitsu-Phil, based on its unaudited financial statements as of said date and payable on or before December 31, 2010. aCcADT It is finally represented that the issue or transaction subject of this 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 judicial appeal per notarized Certification issued by Fujitsu-Phil dated December 20, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies, in general, to dividends received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: "Article 10 DIVIDENDS 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 State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. cHITCS 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since Fujitsu-Singapore holds 25 percent of the total outstanding and voting shares of Fujitsu-Phil during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, which is more than 15 percent of the outstanding and voting shares of Fujitsu-Phil, dividends received by Fujitsu-Singapore shall be subject to the preferential tax rate of 15 percent, pursuant to the Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-68-10 dated December 3, 2010) 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