ITAD BIR Ruling No. 037-15

March 23, 2015 ITAD BIR RULING NO. 037-15 Article 10, Philippines-Singapore tax treaty; Article 10 (2) (a), Philippines-Japan tax treaty, as amended Fujitsu Ten Corporation of the Philippines 100 South Science Avenue Laguna Technopark Don Jose, Sta. Rosa, Laguna Attention: Yukimi Muramatsu President Gentlemen : This refers to your tax treaty relief application filed on July 29, 2011, requesting confirmation that the dividends paid by Fujitsu Ten Corporation of the Philippines ("Fujitsu-Phil") to Fujitsu Ten Limited ("Fujitsu-Japan") and Fujitsu Ten (Singapore) Pte. Ltd. ("Fujitsu-Singapore") are subject to 10 percent preferential tax rate, pursuant to Article 10 of 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"), and to a 15 percent preferential tax, pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") respectively. It is represented that that Fujitsu-Japan, with principal address at 2-28, Gosho-dori, 1-chome Hyogo-ku, Kobe, 652-8510, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Residence Certificate issued by the District Director of Hyogo Tax Office dated May 30, 2011; that Fujitsu-Singapore is a corporation organized and existing under the laws of Singapore and is a resident of Singapore with principal address at 138 Robinson Rd #17-00 Singapore 068906 based on the Certificate of Residence issued by Ms. Chiam Yah Fang, Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated July 6, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated June 14, 2011; and that, on the other hand, Fujitsu-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 100 South Science Avenue, Laguna Technopark, Don Jose Sta. Rosa, Laguna. It is further represented, based on the Secretary's Certificate issued by Fujitsu-Phil dated July 28, 2011, that at the Meeting of the members of the Board of Directors held on July 22, 2011, a resolution was passed and approved declaring cash dividends amounting to Eighteen Million Eight Hundred Thousand Dollars (US$18,800,000.00) out of the unappropriated retained earnings of Thirty-Eight Million Six Hundred Thirty Thousand One Hundred Seven United States Dollars (US$38,630,107.00), to all of its stockholders of record as of March 31, 2011, at the rate of Fourteen & 46/100 (US14.46), United States Currency per share; that as of July 22, 2011, both Fujitsu-Japan and Fujitsu-Singapore have their shares in Fujitsu-Phil as follows: Fujitsu-Japan (a) Type of shares all common (b) Number of shares owned 975,000, inclusive of the six (6) qualifying shares held in trust by the six (6) members of the Board of Directors, with a par value of P100.00 per share (c) Value of Shares P97,500,000.00 (d) Percentage ownership of the total subscribed and paid up capital stock in Fujitsu-Phil 75% (e) Mode of Acquisition through various subscription beginning October 12, 1995 Fujitsu-Singapore (a) Type of shares all common HTcADC (b) Number of shares owned 325,000, with par value of P100.00 per share (c) Value of shares P32,500,000.00 (d) Percentage ownership of the total subscribed and paid up capital stock in Fujitsu-Phil 25% (e) Mode of acquisition through various subscription beginning April 7, 1995 And that the date of payment of the subject dividends is on or before July 29, 2011. It is finally represented that the issue or transactions subject of this 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 judicial appeal per notarized Certification issued by Fujitsu-Phil dated July 28, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies, in general, to dividends received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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. xxx xxx xxx" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, 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 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; 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. SaITHC 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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being, a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Fujitsu-Japan, a resident of Japan with no fixed place of business in the Philippines, holds more than 10 percent of the total subscribed and paid-up capital of Fujitsu Phil six months immediately preceding the date of payment of the dividends, such dividends to be paid by Fujitsu-Phil to Fujitsu-Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. Furthermore, Article 10 of the Philippines-Singapore tax treaty provides: "Article 10 Dividends 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 State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since Fujitsu-Singapore, a resident of Singapore with no fixed place of business in the Philippines, holds 25 percent voting shares of the total subscribed and paid-up capital of Fujitsu-Phil during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, which is more than 15 percent of the outstanding and voting shares of Fujitsu-Phil, dividends to be received by Fujitsu-Singapore shall be subject to the preferential tax rate of 15 percent, pursuant to the Article 10 (2) (a) of the Philippines-Singapore tax treaty. AaEDcS 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