ITAD BIR Ruling No. 034-11

January 31, 2011 ITAD BIR RULING NO. 034-11 Article 10, Philippines-Japan Tax Treaty, as amended; Section 28, Tax Code of 1997; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Fujitsu Ten Corporation of the Philippines 100 South Science Avenue Laguna Technopark Don Jose, Sta. Rosa, Laguna Attention: Yukimi Muramatsu President Gentlemen : This refers to your application for tax treaty relief dated December 21, 2010 requesting confirmation of the application of a 10 percent preferential tax rate on the dividend payments of Fujitsu Ten Corporation (hereinafter referred to as "Fujitsu Corp" ) to Fujitsu Ten Limited (hereinafter referred to as "Fujitsu Ltd" ) pursuant to 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 (hereinafter referred to as "Philippines-Japan tax treaty, as amended" ). It is represented that Fujitsu Ltd. , with head office address at 2-28, Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan, is a foreign corporation organized and existing under the laws of Japan and a resident thereof per Certificate of Residence issued by Hyogo Tax Office dated November 22, 2010; that Fujitsu Ltd. is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) dated December 6, 2010; and that Fujitsu Corp. , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address located at 100 South Science Avenue, Laguna Technopark, Sta. Rosa City, Laguna, Philippines. It is also represented that as of October 22, 2010, Fujitsu Ltd. owns 975,000 common shares, inclusive of the six (6) qualifying shares held in trust by the six (6) members of the Board of Directors, with a par value of P100.00 per share, amounting to P97,500,000.00 and which constitute seventy-five percent (75%) of the total subscribed and paid-up capital of Fujitsu Corp. ; that the P50,000,000 worth of shareholdings of Fujitsu Ltd. in Fujitsu Corp. were acquired thru subscription and payment on August 17, 1999 when Fujitsu Corp. was incorporated and registered with the SEC as one of the original subscribers while the P47,500,00.00 * worth of shareholdings were acquired on October 12, 1995 through subscription and payment when Fujitsu Corp. issued new shares out of its unissued capital stock, per Secretary's Certificate issued by Fujitsu Corp. dated December 20, 2010. ETHaDC It is further represented that at the Special Meeting of the Board of Directors of Fujitsu Corp. on October 22, 2010, cash dividend was declared in the amount of Dollars Two Million Five Hundred Thousand, United States Currency (US$2,500,000.00) out of the unappropriated retained earnings of Dollars Nineteen Million Eight Hundred Thirty Thousand One Hundred Nineteen (US$19,830,119.00), United States currency, as of September 30, 2010 of Fujitsu Corp. based on its unaudited financial statements as of September 30, 2010, to be paid on or before December 31, 2010 to all the stockholders of record as of October 22, 2010 at the rate of US$1.92 per share; and that the transaction subject of the herein request for ruling is not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per Certification issued by Fujitsu Corp. dated December 20, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies to dividend income derived in the Philippines by a nonresident foreign corporation. It provides, viz. : "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, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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" In relation thereto, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which provides as follows: "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; EDSAac (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. 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. 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. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State. Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least ten percent of the voting shares of the company paying the dividends 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; and in all other cases, 15 percent rate shall apply. Considering that since year 1999, Fujitsu Ltd. owns 75% shares in Fujitsu Corp. , which is more than the 10 percent shareholding requirement of the total shares issued by that company, as shown in the certification issued by the Corporate Secretary of Fujitsu Corp. dated December 20, 2010, then the dividends paid to Fujitsu Ltd. by Fujitsu Corp. are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 35-10 dated September 14, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 7-10 dated May 20, 2010) This ruling is issued on the basis of the 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. CScaDH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue