ITAD BIR Ruling No. 038-14

April 14, 2014 ITAD BIR RULING NO. 038-14 Article 10, Philippines-Japan tax treaty Nonato and Nonato Law Offices Room 406, Tulips Center A.S. Fortuna Street, Bakilid Mandaue City, Cebu Attention: Atty. Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application filed on December 10, 2013 requesting confirmation that dividends to be paid by Merasenko Corporation ("Merasenko") to Senko Medical Instruments Manufacturing Company Ltd. ("Senko Medical Instruments") are subject to income tax in the Philippines at a rate of 10 percent based on the gross amount thereof pursuant to 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 , as amended by a Protocol . 1 ("Philippines-Japan tax treaty"). It is represented that Senko Medical Instruments is a foreign corporation and is a resident of Japan based on the Certificates of Residence issued by the Hongo Tax Office in Japan dated November 19, 2013; that Senko Medical Instruments is situated at 3-23-13 Hongo, Bunkyo-ku, Tokyo, Japan; that Senko Medical Instruments is not registered as corporation or as partnership in the Philippines based on the Certifications of Non-Registration of Company issued by the Securities and Exchange Commission dated November 26, 2013; and that, on the other hand, Merasenko is a domestic corporation situated at the Mactan Ecozone II, Basak, Lapulapu City, Cebu, Philippines, and is registered with the Philippine Economic Zone Authority as an ecozone export enterprise under Certificate of Registration No. 95-124 dated November 20, 1995. It is further represented that on November 27, 2013, Merasenko declared cash dividends of PhP1,500,000 in favor of its stockholders; that as of November 17, 1995; that Senko Medical Instruments owns 159,417 of the outstanding shares of voting stock of Merasenko equivalent to 33.31%, based on the Certificate issued by the Corporate Secretary of Merasenko on November 27, 2013; and that Merasenko paid the said dividends to Senko Medical Instruments on December 16, 2013 based on the Bank Certification issued by RCBC on December 17, 2013. It is finally represented, based on a notarized Sworn Statement by the same Corporate Secretary of Merasenko dated December 6, 2013, that the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that a foreign corporation like Senko Medical Instruments , whether or not engaged in trade or business in the Philippines, are subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a tax treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, and 3, Article 10 thereof provide: "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" Based on the aforequoted provisions, dividends arising in the Philippines 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 dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent of the gross amount of the dividends if the company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that Senko Medical Instruments holds directly at least 10 percent (in fact, 33.31%) of the total shares of stock of Merasenko during the period of six months immediately preceding the date of payment of the dividends, (in this case since November 17, 1995), such dividends paid by Merasenko to Senko Medical Instruments are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. 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 Footnotes 1. Signed on February 13, 1980, and effective January 1, 1981.