ITAD BIR Ruling No. 032-11

January 28, 2011 ITAD BIR RULING NO. 032-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-7-10; BIR Ruling No. ITAD-8-10; BIR Ruling No. DA-ITAD-69-10; BIR Ruling No. DA-ITAD-68-10 Asia Pacific Business Legal Consulting 2nd Floor Bldg., B. Mactan Marina Mall Mactan Economic Zone I Ibo, Lapulapu City 6015, Cebu Attention: Mr. Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your letter dated March 26, 2010 requesting confirmation of your opinion that dividends to be paid by Cozo Philippines ("Cozo-Phil") to Cozo Filters Corporation ("Cozo-Japan") are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) 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 Cozo-Japan is a corporation organized and existing under the laws of Japan with principal address at 3-16-15 Shiroganedai, Minato-ku, Tokyo, Japan, as evidenced by its Articles of Incorporation; that it is not registered as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 17, 2010; and that, on the other hand, Cozo-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Mactan Economic Zone I, Lapulapu City, Cebu, Philippines. It is further represented that on March 9, 2010, the Board of Directors of Cozo-Phil, under Board Resolution No. 1 Series of 2010, declared cash dividends of PHP46,000,000.00 for the stockholders of record of Cozo-Phil as of March 1, 2010; that such dividends were paid on March 31, 2010, based on the notarized Certificate issued by the Corporate Secretary of Cozo-Phil dated May 19, 2010; that based on the same certificate, Cozo-Japan holds 384,995 of the total 385,000 shares of Cozo-Phil, which has a par value of PHP100.00 each, or, for Cozo-Japan, a total of PHP38,499,500.00, representing 99.99% ownership and shareholdings in Cozo-Phil; and that this number of shares is held by Cozo-Japan for at least six months prior to the date of payment of the dividends on March 31, 2010. It is finally represented, that per Affidavit executed by the General Manager of Cozo-Phil dated May 19, 2010, 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 proceeding, or judicial appeal. ITaCEc 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 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: 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." In relation to a treaty, paragraphs 1, 2 and 3, Article 10 of the Philippines-Japan tax treaty, as amended, read: "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 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) 15 per cent of the gross amount of the dividends in all other cases. 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." DaHcAS Based on the aforeqouted 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, 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 Cozo-Japan holds directly 99.99% ownership and shareholding in Cozo-Phil (which is more than the minimum required of 10 percent), and that Cozo-Japan maintains this shareholding for at least six months immediately preceding the date of payment of the dividends on March 31, 2010, such dividends paid by Cozo-Phil to Cozo-Japan are subject to the preferential tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-7-10 dated May 20, 2010; BIR Ruling No. ITAD-8-10 dated June 3, 2010; BIR Ruling No. DA-ITAD-69-10 dated June 25, 2010; BIR Ruling No. DA-ITAD-68-10 dated June 21, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and effective January 1, 1980.