ITAD BIR Ruling No. 032-12

February 8, 2012 ITAD BIR RULING NO. 032-12 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 Sun Logistics Technology, Inc. Sitio Arajan, Pulong Sta. Cruz Sta. Rosa, Laguna Attention: Mr. Kenji Ueda President Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 26, 2011, requesting confirmation that the dividend payments of Sun Logistics Technology, Inc. ("Sun Logistics") to Mitsui & Co., Ltd. ("Mitsui") are subject to the 10 percent preferential withholding tax rate pursuant of the Article 10 (3) 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"). It is represented that Mitsui, with principal address at 2-1, Otemachi 1-Chome, Chiyoda-ku, Tokyo, Japan, is a resident of Japan within the meaning of the Philippines-Japan tax treaty per the Certificate of Residence issued by the District Director of Kojimachi Tax Office on April 8, 2011; that it was licensed to engage in business in the Philippines on March 27, 1967 through the establishment of a branch ("Mitsui-Phil branch") per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated April 18, 2011; and that, on the other hand, Sun Logistics is a corporation organized and existing under the laws of the Philippines with principal address at Sitio Aratan, Pulong Sta. Cruz, Sta. Rosa, Laguna; and that it is registered with the Board of Investments (BOI) under Registration No. EP 96-378 dated January 30, 1997, as Pioneer Service Exporter in the Field of Packaging of Commodities for Export with Custom Made Packaging Materials for Automotive Parts and Components. It is further represented that although Mitsui has a branch here in the Philippines, its investments or shares of stock in Sun Logistics were directly acquired by Mitsui without the participation of its Philippine branch, based on the notarized Certification issued by Mitsui-Phil. branch on May 12, 2011; that per Certification issued by the Corporate Secretary of Sun Logistics, Mitsui owns One Hundred Twenty Thousand (120,000) shares of stock with a total par value of Twelve Million Pesos (P12,000,000), or 10% of the entire stockholdings of Sun Logistics; that during the organizational meeting of the Board of Directors of Sun Logistics on April 15, 2011, a resolution was unanimously passed and approved declaring a cash dividend in the total amount of Twenty Million Pesos (P20,000,000.00) to be distributed in favor of all stockholders of record in proportion to their respective current equity holdings in Sun Logistics; and that the said cash dividends shall be paid to the respective stockholders not later than May 31, 2011. EHSITc It is finally represented, per Certification dated April 20, 2011 issued by Sun Logistics, 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. 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. (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: HCETDS (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It 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 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. 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. 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." CTEacH 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 BOI and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines. However, under paragraph 5 of Article 10, the Philippines, being the source of the dividends, is not obliged to limit the tax rates on dividends under paragraphs 2 and 3 of the article if the holding in respect of which the dividends are paid is effectively connected with a permanent establishment which Mitsui has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, Mitsui-Phil. branch, being the branch office in the Philippines of Mitsui, is considered a permanent establishment of Mitsui, thus: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources." On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 17, 2008) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: "24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) (Pages 156-157) HSDCTA Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), dividends derived by a foreign corporation can become effectively connected with its branch office in the Philippines if the business activities that give rise to such dividends are conducted through the branch office, following the principal-agent relationship theory, 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 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 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 ." (Underscoring supplied) aSCHIT Accordingly, the holdings in respect of the dividends paid by Sun Logistics to Mitsui are not effectively connected with Mitsui-Phil. branch since they are not paid in respect of holdings forming part of the assets of Mitsui-Phil. branch or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through Mitsui-Phil. branch. This is because Mitsui-Phil. branch has no investments nor owns shares of stock in Sun Logistics; does not use or hold for use in the conduct of its trade or business any shares of stock in Sun Logistics; the head office of Mitsui in Japan acquired such shares in Sun Logistics directly and without the participation of Mitsui-Phil. branch; dividends arising from these shares inure to the sole benefit of Mitsui and Mitsui-Phil branch did not receive any of these dividends; and Mitsui-Phil. branch is not a material factor in the realization of dividends received by the Mitsui. In view thereof and considering that Sun Logistics is a domestic corporation registered with the BOI and engaged in pioneer areas of activities in the Philippines, such dividends paid by Sun Logistics to Mitsui are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (3) of the Philippines-Japan tax treaty, as amended. (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) 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