ITAD BIR Ruling No. 036-13

February 25, 2013 ITAD BIR RULING NO. 036-13 Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-329-12 FCC (Philippines) Corp. 106 North Science Avenue, Laguna Technopark Bian, Laguna Attention: Koichi Kumagai President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 9, 2011 requesting confirmation that the dividends paid by FCC (Philippines) Corp. ("FCC Philippines") to F.C.C. Co., Ltd. ("FCC") are subject to the preferential 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") . aTADcH It is represented that FCC is a foreign corporation organized and existing under the laws of Japan and is a tax resident of Japan, with principal office at 7000-36, Nakagawa, Hosoe-cho, Kita-ku, Hamamatsu-City, Shizuoka-Pref, Japan based on the Certification issued by the District Director of Hamamatsunishi Tax Office dated June 15, 2011; that FCC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation issued by the Securities and Exchange Commission on May 30, 2011; and that, on the other hand, FCC Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 106 North Science Avenue, Laguna Technopark, Bian, Laguna, Philippines. It is further represented that on August 8, 2011 the Board of Directors of FCC Philippines declared cash dividends in the amount of Twenty Million Pesos (Php20,000,000.00) out of the unrestricted retained earnings in favor of all stockholders of record as of March 31, 2011, payable on August 11, 2011 ; and that FCC holds 199,995 shares constituting 99.9975 percent of the issued and outstanding shares of FCC Philippines since 1994. It is further represented that the issue or transaction subject of this request or 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 as per certification issued by FCC Philippines dated July 29, 2011. It is finally represented, as evidenced by a Certification of Outward Remittance issued by Rizal Commercial Banking Corporation Laguna Technopark Business Center, that FCC Philippines remitted to FCC an amount of JPY33,112,583.00, as dividend payment on August 11, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides: "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, . . .: 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 that any income derived by a foreign corporation may be exempt from income tax to the extent required by any treaty obligation binding upon the government of the Philippines, thus: "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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked 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; SDcITH 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. . . ." 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 exceeding 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; and 15 percent in all other cases. Accordingly, since FCC holds directly 99.9975 percent of the total shares of stock of FCC Philippines during the period of 6 months immediately preceding the date of payment of the dividends, such dividends paid by FCC Philippines to FCC are subject to income tax at the rate of 10 percent of the gross amount thereof. ( BIR Ruling No. ITAD-329-12 dated September 3, 2012 ). 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