ITAD BIR Ruling No. 035-10

September 14, 2010 ITAD BIR RULING NO. 035-10 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. 87-83; BIR Ruling No. ITAD-20-99; BIR Ruling No. ITAD-8-99; BIR Ruling No. ITAD-47-99; BIR Ruling No. ITAD-41-99; BIR Ruling No. ITAD-007-10 Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Balikid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Legal Counsel Gentlemen : This refers to your letter dated December 29, 2009 on behalf of IWAKAMI CO. LTD. (hereinafter referred to as "ICL"), requesting for a ruling confirming that the cash dividends received from CEBU IWAKAMI CORPORATION (hereinafter referred to as "CIC") are subject to the 10 percent withholding tax 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 (hereinafter referred to as the Philippines-Japan tax treaty ). It is represented that ICL is a foreign corporation duly organized and established under the laws of Japan on December 1961, and is a resident of and subject to taxation in Japan under Tax ID No. 00022551, with address at 2-4-9 Takara-machi Katsushika-ku, Tokyo, 124-0005 per certification by the District Director, Katsushika Tax Office, Tokyo issued on September 18, 2009; that ICL 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 dated January 5, 2010; that CIC, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at 6th St., Block-B6, Mactan Economic Zone I, Lapulapu City, Cebu; that it is duly registered with the Export Processing Zone Authority (EPZA) [now Philippine Economic Zone Authority (PEZA)] with Certificate of Registration No. 95-48 issued on April 17, 1995; that CIC has a total subscribed and paid-up common shares of 367,821 amounting to P36,782,100.00; that ICL has subscribed and paid-up common shares of 129,300 with an equivalent amount of P12,930,000.00 which represents 35.15% of the total subscribed and paid-up capital of CIC, per Secretary's Certificate issued by CIC dated December 18, 2009 and a certified true copy of the duly notarized General Information Sheet dated November 25, 2009. It is also represented that during a special meeting of the Board of Directors of CIC held on June 8, 2009, it was resolved that an amount of P9,195,525.00 be declared as cash dividends to be taken out of the unrestricted retained earnings or surplus profit of CIC as of fiscal year ended July 31, 2008, in favor of stockholders of record as of July 31, 2008, per certified copy of the Board Resolution dated June 22, 2009; that out of the declared cash dividends of P9,195,525.00, a portion in the amount of P3,232,500.00 was paid to ICL as evidenced by BIR Form 1601F Schedule 1 (Alphabetical List of Payees from whom Taxes were Withheld for the Month of June, 2009) received by the BIR accredited agent bank on July 10, 2009; that the date of payment of the said cash dividends is June 2009 per Secretary's Certificate issued by CIC dated December 18, 2009; 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended 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 NIRC of 1997, as amended, 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: DHcEAa 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 accordance with the foregoing, Article 10 of the Philippines-Japan tax treaty may apply to the subject request for ruling. It provides, viz. : "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 25 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) 25 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 provision, 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 of the gross amount of dividends if the latter holds at least 25 percent either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25 percent preferential tax rate shall apply. cHaADC In relation thereto, a 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 took effect on January 1, 2009, Article III of which reads as follows: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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." Pursuant to the above Protocol, the 25 percent shareholding requirement under Article 10 (2) of the Philippines-Japan tax treaty was reduced to 10 percent. Moreover, the 25 percent preferential tax rate which applies in all other cases was reduced to 15 percent. In view of thereof and considering that during the period of 6 months immediately prior to the date of payment of the cash dividends on June 2009, ICL owns 129,300 shares which represents 35.15% of the total share of CIC, the subject cash dividends in the amount of P3,232,500.00 which were paid by CIC to ICL, are subject to the 10 percent preferential tax rate, pursuant to the Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 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. TIADCc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue