ITAD BIR Ruling No. 038-11

February 8, 2011 ITAD BIR RULING NO. 038-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-60-10 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on November 9, 2010, on behalf of your client, Mitsubishi Corporation-Tokyo Head Office ("Mitsubishi-Tokyo") requesting confirmation of your opinion that the cash dividends paid by TeaM Diamond Holding Corporation ("TDHC") to Mitsubishi-Tokyo is subject to final withholding tax at a rate of 10 percent of the gross amount 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 ("Philippines-Japan tax treaty") , 1 as amended by a Protocol effective January 1, 2009. It is represented that Mitsubishi-Tokyo is a corporation organized and existing under the laws of Japan with principal address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan based on a Residence Certificate issued on October 22, 2010 by Yoshinobu Ono, District Director of Kojimachi Tax Office; that it was licensed to engage in business in the Philippines on March 20, 1967 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated May 13, 2010, and that to date, no petition for the withdrawal or cancellation of license have been filed by it; that on the other hand, TDHC is a corporation organized and existing under the laws of the Philippines with principal address at CTC Building, 2234 Roxas Boulevard, Pasay City. It is further represented, based on a notarized affidavit by Mitsubishi Corporation-Manila Branch on October 26, 2010, that although Mitsubishi-Tokyo has a branch in the Philippines, (1) Mitsubishi Corporation-Manila Branch has no investments in TDHC and does not own shares of stock in TDHC as shown in the Audited Financial Statements of Mitsubishi Corporation-Manila Branch for the Fiscal Year ending March 31, 2010; (2) Mitsubishi Corporation-Manila Branch likewise does not use or hold for use in the conduct of its trade or business any shares of stock in TDHC; (3) Mitsubishi-Tokyo acquired the TDHC's shares and the said acquisition was made without the participation of Mitsubishi Corporation-Manila Branch; (4) all gains inured to the sole benefit of Mitsubishi-Tokyo and Mitsubishi Corporation-Manila Branch did not receive any of the gains, and that Mitsubishi Corporation-Manila Branch is not a material factor in the realization of any gain received by Mitsubishi-Tokyo; that per Secretary's Certificate issued by TDHC on October 29, 2010, the total outstanding common shares registered under the name of Mitsubishi-Tokyo and its nominee directors are 12,370,688 shares or 51.21% of the total issued and outstanding common shares of TDHC; that during the regular board meeting of the Board of Directors of TDHC on October 14, 2010, a resolution was unanimously adopted and approved to declare dividend in the amount of US$4,100,000.00, payable to all of its stockholders of record as of October 14, 2010; and that the said dividend was paid on October 29, 2010. It is finally represented 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 sworn certification issued by TDHC dated October 29, 2010. 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 dividends received by a nonresident foreign corporation. It 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. xxx xxx xxx" Thus, the provisions of 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 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. 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. xxx xxx xxx." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount in all other cases. Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents. (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 are 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 in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by TDHC to Mitsubishi-Tokyo shall be considered as income of Mitsubishi-Tokyo as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). In view thereof and considering that Mitsubishi-Tokyo holds more than 10 percent of shareholdings in TDHC for a period of 6 months immediately preceding the date of payment of the dividends which is on October 29, 2010, said dividends paid by TDHC to Mitsubishi-Tokyo are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-60-10 dated November 3, 2010) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and effective January 1, 1980.