ITAD BIR Ruling No. 034-12

February 8, 2012 ITAD BIR RULING NO. 034-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-008-10 Jimenez Gonzales Bello Valdez Caluya & Fernandez JGLAW SOL Building, 112 Amorsolo Street Legaspi Village, Makati City Attention: Atty. Maureen B. de Castro Gentlemen : This refers to your tax treaty relief application filed on September 19, 2011, requesting confirmation that dividends paid to Mitsuba Corporation ("Mitsuba") by Mitsuba Philippines Technical Center Corporation ("Mitsuba Philippines") are subject to a preferential tax rate of 10 percent pursuant to 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"), as amended by a Protocol 1 effective January 1, 2009. It is represented that Mitsuba is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on the Certificate of Status of Taxable Person issued by Kiryu Tax Office on November 17, 2011; that Mitsuba is situated at 1-2681 Hirosawa-cho, Kiryu-City, Gunma 376-8555, Japan; that Mitsuba is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by Securities and Exchange Commission ("SEC") on May 12, 2011; and that, on the other hand, Mitsuba Philippines is a domestic corporation situated at 3rd Floor Dusit Thani Manila, Edsa corner Arnaiz Avenue, Ayala Center, Makati City, Philippines. It is further represented, that on November 11, 2010, the Board of Directors of Mitsuba Philippines, at its meeting, declared cash dividends amounting to P20,000,000.00 out of the unrestricted retained earnings of P27,025,261.00 as of December 31, 2009, in favor of the stockholders of record of Mitsuba Philippines as of November 11, 2010, to be paid on September 30, 2011; that Mitsuba is the legal and beneficial owner of 339,995 shares with a par value of P100.00 per share constituting 99.99 percent of the entire stockholdings of Mitsuba Philippines, which were acquired on April 13, 2000 and on November 20, 2008. acCITS It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Director and Treasurer of Mitsuba Philippines on April 15, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to Mitsuba, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 interests, 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "Section 32. Gross Income. SacTCA 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 tax treaty, you invoke 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 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. 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. HTDCAS 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. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) beginning, January 1, 2009, 10 percent of the gross amount of dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent of the gross amount of the dividends if the domestic company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that Mitsuba holds directly at least 10 percent of the total shares of stock of Mitsuba Philippines during the period of six months immediately preceding the date of payment of the dividends which is not later than September 30, 2011, such dividends paid by Mitsuba Philippines to Mitsuba are subject to income tax at the reduced rate of 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 008-10 dated June 3, 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. EHcaDT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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.