ITAD BIR Ruling No. 034-13

February 25, 2013 ITAD BIR RULING NO. 034-13 Article 10, Philippines-Japan tax treaty, as amended San Miguel Brewery, Inc. 5th Floor, SMC Head Office Complex No. 40 San Miguel Avenue Mandaluyong City Attention: Mr. Kosuke Nagasato Senior Consultant, Finance Gentlemen : This refers to your tax treaty relief application filed on December 13, 2010 requesting confirmation that the dividends paid by your company, SAN MIGUEL BREWERY, INC. ("SMB") to KIRIN HOLDINGS COMPANY, LIMITED ("KIRIN"), are subject to the preferential tax rate of 10 percent 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 ("Philippines-Japan tax treaty, as amended") . STECDc It is represented that KIRIN, with address at 10-1, Shinkawa, 2-chome, Chuo-ku, Tokyo, Japan 104-8288, is a resident of Japan within the meaning of the Philippines-Japan tax treaty, per Certification by the District Director of Kyobashi Tax Office on July 27, 2011; that KIRIN 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 Philippine Securities and Exchange Commission on December 10, 2010; that SMB, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with address located at 5th Floor SMC Head Office Complex, No. 40 San Miguel Avenue, Mandaluyong City; that, as shown in Secretary's Certificate issued by SMB on December 16, 2011, as of the date of payment of cash dividends, SMB's total number of issued and outstanding shares is 15,410,478,960; that of the said total number of SMB outstanding shares, KIRIN owns a total of 7,456,879,880 inclusive of the 20,000 shares issued to its nominee directors comprising of 48.39% ownership in SMB. It is also represented that at the regular meeting of the Board of Directors of SMB on November 10, 2010, a resolution was approved declaring a cash dividend of P0.14 per share to be paid on December 13, 2010 to all stockholders of record as of November 25, 2010 and such amounts, as may be necessary therefor, be appropriated out of the unappropriated retained earnings of SMB. It is further represented that the transaction subject of the herein TTRA 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 the sworn certification executed by the Manager of the Accounting and Financial Services of SMB on December 13, 2010. Finally, as shown in the letter advise of HSBC to SMB, cash dividend in the amount of USD21,514,605.69 was remitted by SMB to KIRIN on December 13, 2010. In reply, please be informed that dividends derived in the Philippines by a nonresident foreign corporation, as in the case of KIRIN, are generally governed by Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended. 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, under Section 32 (B) (5) of the NIRC of 1997, the said income may be exempt, or partially exempt from Philippine income tax. It provides, viz. : "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, Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides, viz. : CIScaA "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. 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. xxx xxx xxx" Based on the above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter holds at least 10 percent either of the voting shares or of the total shares of the Philippine company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent preferential tax rate shall apply. In view thereof and considering that KIRIN holds 48.39 percent shares in SMB during and more than the period of 6 months prior to the date of payment of the dividends on December 13, 2010, this Office is of the opinion and so holds that the dividends paid by SMB to KIRIN are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue