ITAD BIR Ruling No. 029-12

February 1, 2012 ITAD BIR RULING NO. 029-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 35-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 8-10; BIR Ruling No. ITAD 7-10 Castillo Laman Tan Pantaleon & San Jose The Valero Tower 122 Valero Street, Salcedo Village Makati City 1227 Attention: Ma. Pilar Pilares-Gutierrez Abigail D. Sese Gentlemen : This refers to your Tax Treaty Relief Application dated June 27, 2011, on behalf of HITACHI METALS, LTD. ("Hitachi") ,requesting confirmation of your opinion that dividends received by Hitachi from SAN TECHNOLOGY, INC. ("San Technology") are subject to the preferential tax rate of 10 percent pursuant to the 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 (hereinafter referred to as the "Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. Facts It is represented that Hitachi 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, based on its Articles of Incorporation and on the Certificate of Residence issued by the Tax Authority of Japan; that Hitachi is situated in No. 2-1, Shibaura 1-chome Minatoku, Tokyo, Japan; that Hitachi is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated June 3, 2011; and that, on the other hand, San Technology is a corporation organized and existing under the laws of the Philippines with office address at Neomax Plant 2, Block 7, Phase 2, Cavite Economic Zone Rosario, Cavite, Philippines. It is further represented that on May 30, 2011, the Board of Directors of San Technology, duly approved a resolution declaring cash dividends amounting to US$4,110,000.00 out of the unrestricted retained earnings of San Technology as of March 31, 2011 in favor of Hitachi, payable within the month of June 2011; that as of May 31, 2011, Hitachi holds 100% percent of the total issued and outstanding capital stock of the entire capital stock of San Technology which shares were acquired by Hitachi in 2007 and 2008, based on the Certificate issued by the same Corporate Secretary; and that the dividends were actually paid to Hitachi on June 27, 2011. It is finally represented that the dividends subject of the request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Certificate issued by the incumbent Assistant Corporate Secretary of San Technology on June 6, 2011. Ruling In reply, please be informed that dividends derived by a nonresident foreign corporation are taxable generally under Section 28, (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, which provides: DAETHc "SEC. 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 interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such dividends may be exempt (or partially exempt) from income tax pursuant to a treaty obligation to which the Philippine government is bound. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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: 1 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." With respect to a tax treaty, Article 10 of the Philippines-Japan tax treaty, as amended, 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 percent 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 percent of the gross amount of the dividends in all other cases. 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." Under paragraph 2 above, the Philippines may tax dividends paid by a domestic company to a company resident of Japan at a rate not exceeding 10 percent of the gross amount thereof if the last-mentioned company holds directly at least 10 percent of the voting shares 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. Otherwise, a rate of 15 percent applies. In view of the foregoing, considering that, as of May 31, 2011, Hitachi holds 100 percent of the total issued and outstanding capital stock of the entire capital stock of San Technology and that Hitachi maintains this percentage of shareholdings for a period of six months prior to the date of payment of the dividends on or before June 2011, such dividends to be paid by San Technology to Hitachi are subject to the preferential tax rate of 10 percent based on 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 facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. ECSHID Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. TITLE II TAX ON INCOME.