ITAD BIR Ruling No. 031-11

January 28, 2011 ITAD BIR RULING NO. 031-11 Article 10 Philippines-Japan tax treaty, as amended; BIR Ruling No. 109-95; BIR Ruling No. 174-95; BIR Ruling No. DA-ITAD-208-02; BIR Ruling No. ITAD-9-09; BIR Ruling No. DA-ITAD-69-10 Philippine Resins Industries, Inc. Unit 2104, Antel 2000 Corporate Center 121 Valero Street, Salcedo Village Makati City Attention: Mr. Tomoyuki Koike President Gentlemen : This refers to your letter dated March 18, 2010, requesting confirmation of your opinion that dividends to be paid by Philippine Resins Industries, Inc. ("Philippine Resins") to Tosoh Corporation ("Tosoh") and Mitsubishi Corporation ("Mitsubishi-Japan") are subject to the preferential tax rate of 10 percent pursuant to Article 10 of 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 ("Philippines-Japan tax treaty") , 1 as amended by the Protocol Amending 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 , which took effect on January 1, 2009. It is represented that Tosoh and Mitsubishi-Japan are foreign corporations organized and existing under the laws of Japan and are residents of Japan based on their Residence Certificates issued by the District Director of the Tokuyama Tax Office on February 12, 2010, for Tosoh, and by the District Director of the Kojimachi Tax Office on February 15, 2010, for Mitsubishi-Japan; that the principal address of Tosoh is at 4560 Kaisei-cho, Shuunan-shi, Yamaguchi 746-8551, Japan, and that of Mitsubishi-Japan is at 3-1, Marunouchi 2-chome, Chiyoda-Ku, Tokyo, Japan; that Tosoh is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) on March 15, 2010 while Mitsubishi-Japan is licensed to engage in business in the Philippines under SEC No. F-491 since March 20, 1967, based on the Certificate of Corporate Filing/Information issued by the SEC on February 25, 2010; that, on the other hand, Philippine Resins is a domestic corporation with principal address situated at Unit 2104, Antel 2000 Corporate Center, 121 Valero Street, Salcedo Village, Makati City, Philippines; that Philippine Resins is registered with the Board of Investments under Certificate of Registration No. DP 94-124 dated May 20, 1994; and that it has a pioneer status as a new producer of suspension type polyvinyl chloride (PVC) resin, with registered capacity of 60,000 metric tons per year (180 metric tons per day). ITESAc It is further represented based on the two Secretary's Certificates issued by the Corporate Secretary of Philippine Resins both dated March 17, 2010, that on March 17, 2010, at the regular meeting of the Board of Directors of Philippine Resins and at the Joint Annual Stockholders and Organizational Board Meeting of that corporation, a resolution was approved declaring cash dividends of PHP1.50 per share to the 72,400,000 outstanding common shares of Philippine Resins as of February 28, 2010; that the dividends will be paid on March 29, 2010, with Tosoh and Mitsubishi-Japan to receive PHP86,880,000.00 and PHP21,720,000.00, respectively; and that as of February 28, 2010, Tosoh and Mitsubishi-Japan respectively hold 57,919,996 (equivalent to PHP579,199,960.00 at PHP10.00 per share) and 14,479,999 (PHP144,799,990.00) shares in Philippine Resins, which represent 80.00 percent and 19.99 percent shareholdings in that corporation. It is also represented, based on the Affidavit issued by Mitsubishi Corporation Philippine Branch (Mitsubishi Philippine Branch) dated March 17, 2010, that Mitsubishi Philippine branch has no investments in Philippine Resins and does not own shares of stock in that corporation; that Mitsubishi Philippine Branch does not use or hold for use in the conduct of its trade or business any shares of stock in the Philippine Resins; that the head office of Mitsubishi-Japan acquired the shares in Philippine Resins and such acquisition was made directly by the former without the participation of Mitsubishi Philippine Branch; that, consequently, all gains in such undertaking inured to the sole benefit of Mitsubishi-Japan and that Mitsubishi Philippine Branch did not receive any such gains; and that Mitsubishi Philippine Branch is not a material factor in the realization of any gain received by Mitsubishi-Japan. It is finally represented, based on the Certificate issued by Philippine Resins dated March 17, 2010, that the issue or transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides that any income derived by a foreign corporation may be exempt to the extent required by any treaty obligation binding upon the government of the Philippines, thus: HcTEaA "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" With respect to a treaty, what you invoked for this purpose is the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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 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) 25 per cent 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. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends." Under paragraph 3 of Article 10 above, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at the rate not to exceed 10 percent of the gross amount of the dividends if the dividends are paid by a company, being a resident of the Philippines, registered with the Board of Investments (BOI) and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines. Accordingly, since Philippine Resins is a domestic corporation registered with the BOI and engaged in pioneer areas of activities in the Philippines, such dividends to be paid by Philippine Resins to Tosoh and Mitsubishi-Japan are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. 109-95 dated July 21, 1995; BIR Ruling No. 174-95 dated October 25, 1995; BIR Ruling No. DA-ITAD-208-02 dated November 26, 2002) THESAD Moreover, with respect to Mitsubishi-Japan, while it has a branch office in the Philippines, Mitsubishi Philippine Branch, so that such dividends it received from Philippine Resins would be taxed as part of the income of Mitsubishi Philippine Branch, the Supreme Court, in MARUBENI CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS (G.R. No. 76573 dated September 14, 1989), (Marubeni ruling) laid down some conditions for this rule to apply, thus: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Following the jurisprudence in the Marubeni ruling, this Bureau maintains that such dividends paid by Philippine Resins to Mitsubishi-Japan shall be taxed as income of Mitsubishi-Japan and not of Mitsubishi Philippine Branch and subject to the preferential rate of 10 percent by reason of the following: 1. Mitsubishi Philippine Branch has no investments in Philippine Resins and does not own shares of stock in that corporation; 2. Mitsubishi Philippine Branch does not use or hold for use in the conduct of its trade or business any shares of stock in Philippine Resins; 3. Mitsubishi-Japan acquired the shares in Philippine Resins and such acquisition was made directly by the former without the participation of Mitsubishi Philippine Branch; 4. Consequently, all gains in such undertaking inured to the sole benefits of Mitsubishi-Japan and that Mitsubishi Philippine Branch did not receive any such gains; and 5. Mitsubishi Philippine Branch is not a material factor in the realization of any gain received by Mitsubishi-Japan. (BIR Ruling No. ITAD-9-09 dated April 1, 2009; BIR Ruling No. DA-ITAD-69-10 dated June 25, 2010) 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. SDATEc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and effective January 1, 1981.