ITAD BIR Ruling No. 030-13

February 18, 2013 ITAD BIR RULING NO. 030-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Asia Pacific Business Legal Consulting 2nd Floor, Building B, Mactan Marina Mall Mactan Economic Zone 1, Pusok Lapulapu City, Cebu Philippines Attention: Lauris L. dela Pea Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 6, 2012, on behalf of Global Research and Trading Corporation ("Global Research") , requesting confirmation that dividends paid by GRT (Cebu) Corporation ("GRT-Cebu") to Global Research is subject to preferential rate of 10 percent pursuant to Article 10 of 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") . CDAcIT It is represented that Global Research , with address at 1349-15 Oohiraki, Urasaki-cho, Onomichi-city, Hiroshima-pref, Japan, 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 per the Residence Certificate issued by the District Director of Onomichi Tax Office dated January 20, 2012; 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 February 10, 2012; and that, on the other hand, GRT-Cebu is a corporation organized and existing under the laws of the Philippines, and is registered with the Philippine Economic Zone Authority ("PEZA") under Certificate of Registration No. 11-32 issued on June 2, 2011, with principal address at West Cebu Industrial Park-Special Economic Zone, Balamban, Cebu 6041. It is further represented, that on March 1, 2012, the Board of Directors of GRT-Cebu declared cash dividends in the total amount of One Million United States Dollars (US$1,000,000.00) to its stockholders of record as of January 31, 2012 to be taken out of its accumulated and unrestricted retained earnings as of calendar year ending December 31, 2011, and payable on March 31, 2012; that based on the Corporate Secretary's Certificate of GRT-Cebu issued March 2, 2012, as of the date of record, and six (6) months prior to the date of payment of the dividend, Global Research held 4,999,995 common shares with a total par value of Php4,999,995, and which represents 99.99% ownership and stockholdings in GRT-Cebu ; and that, based on Bank Certification issued by Rizal Commercial Banking Corporation (RCBC) on June 25, 2012, such dividends were remitted to Global Research on April 2, 2012. It is finally represented, per notarized Affidavit dated March 2, 2012 issued by GRT-Cebu , that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling 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, 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 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 . 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 invoke, may apply to the instant case. It provides: IECcaA "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 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 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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Global Research holds 99.99 percent ownership in GRT-Cebu , and that Global Research held these shareholdings six months immediately preceding the date of payment of the dividends, such dividends paid by GRT-Cebu to Global Research are subject to the preferential tax rate of not exceeding 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-11 dated January 28, 2011) This ruling is issued on the basis of the foregoing 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