ITAD BIR Ruling No. 037-10

September 16, 2010 ITAD BIR RULING NO. 037-10 Article 10, Philippines-Japan tax treaty; Article 10, Philippines-Netherlands tax treaty; Precedents for Marubeni Corp BIR Ruling No. ITAD-008-99; Ruling No. ITAD-020-99; BIR Ruling No. 087-83; BIR Ruling No. ITAD-041-99; Ruling No. ITAD-047-99; Precedents for TEPCI BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated April 11, 2008, on behalf of your client, TeaM Energy Corporation (Team Energy), requesting confirmation of your opinion that the dividends to be received by Marubeni Corporation (Marubeni Corp) [formerly MARUBENI-IIDA CO., LTD.] 1 and Tokyo Electric Power Company International B.V. (TEPCI) from TeaM Energy are subject to the preferential tax rate of ten percent (10%) of the gross amount of the dividends pursuant to Article 10 of the Philippines-Japan tax treaty and the Philippines-Netherlands tax treaty respectively. It is represented that Marubeni Corp is a corporation organized and existing under the laws of Japan with principal address at 4-2 Ohtemachi I-Chome, Chiyoda-ku, Tokyo, Japan; that it was licensed to engage in business in the Philippines per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated April 12, 2002; that although Marubeni Corp has a branch in the Philippines, it has investments on its own; that these investments were directly made by it and the dividends on the investments were likewise directly remitted to and received by Marubeni Corp; that TEPCI is a corporation organized and existing under the laws of The Netherlands with principal address at Strawinskylaan 3105 1077 ZX Amsterdam, The Netherlands; that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 15, 2008; that TeaM Energy is a corporation organized and existing under the laws of the Philippines with principal address at CTC Building, 2232 Roxas Boulevard, Pasay City. It is further represented that Marubeni Corp and TEPCI both have shareholdings of 16,534,176 and 16,534,177 respectively, with a par value of 10.00 each representing 27.78% of the outstanding shares with TeaM Energy as of March 25, 2008; that on March 25, 2008 the Board of Directors of TeaM Energy declared a cash dividend amounting to US$2 Million out of the unrestricted retained earnings of the Corporation payable to all the stockholders of record of Common B Stock as of March 25, 2008; that the dividends are payable on or before April 30, 2008; that the issue or transaction subject of this request for 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 per certification issued by Team Energy dated April 14, 2008. aTEHIC In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended applies in general to income received by a nonresident foreign corporation which 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 interest, 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%)." 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." On the dividends received by Marubeni Corp. The provisions of Article 10 of the Philippines-Japan tax treaty, which you invoke, 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 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. 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." CHIaTc Moreover, in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever directly or indirectly, in Marubeni Corporation's investment in Team Energy Corporation, and that the income derived by Marubeni Corporation from the said investment is neither attributable to the branch nor paid or coursed through the latter since any payment is directly remitted to Marubeni Corporation per certification of Mr. Kazunori Iida dated October 2, 2007. Hence, income derived through the payment of dividends by Team Energy to Marubeni Corp shall be considered as income of Marubeni Corp as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). Based on the aforequoted provisions, 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% if the last-mentioned company holds directly at least twenty-five percent (25%) of the voting shares 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; otherwise, said dividends may be taxed at a rate not exceeding 25% of the gross amount in all other cases. Such being the case, and considering that Marubeni Corp. held more than 25% of the total shares of stock of Team Energy during the period of 6 months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the dividend payments by Team Energy to Marubeni Corp. shall be subject to the preferential tax rate of 10%, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD-008-99 dated July 20, 1999; BIR Ruling No. ITAD-020-99 dated August 18, 1999; BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD-041-99 dated November 3, 1999; BIR Ruling No. ITAD-047-99 dated December 9, 1999) On the dividends received by TEPCI The provision of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: HDIATS "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10% preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the fifteen percent (15%) preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: cSEAHa "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10% preferential tax rate are present. Firstly, Team Energy, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. TEPCI, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Team Energy is deemed a domestic corporation, while TEPCI is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, Team Energy is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, TEPCI, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, TEPCI is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated April 7, 2009. Fifthly, the capital of TEPCI is wholly divided into shares, based on the Articles of Incorporation of TEPCI. Lastly, TEPCI directly holds 27.78% of the total amount subscribed and paid up shares of Team Energy , per Secretary's Certificate dated April 7, 2009 issued by the Corporate Secretary of Team Energy , or more than the required stockholdings of 10%. Based on the above-cited provisions, the 10% preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10% of the capital of the paying company. In all other cases, 15% preferential tax rate applies. Such being the case and considering that TEPCI holds more than 10% of the capital of Team Energy, this Office is of the opinion and so holds that the dividend payments by Team Energy to TEPCI shall be subject to the preferential tax rate of 10% of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009) This ruling is issued on the basis of the foregoing 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. THacES Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Based on a copy of Certificate of Filing of Certificate of Amendment to the Certificate of Incorporation of a Foreign Corporation, issued by the Philippine Securities and Exchange Commission dated January 14, 1972.