ITAD BIR Ruling No. 040-14

April 14, 2014 ITAD BIR RULING NO. 040-14 Article 10 (3), Philippines-Japan tax treaty, as amended Keppel Subic Shipyard, Inc. Cabangaan Pt., Cawag Subic, Zambales 2209 Attention: Yee Kim Foh Vice President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 30, 2013, requesting confirmation that dividend paid by Keppel Subic Shipyard, Inc. ("Keppel") to Kawasaki Heavy Industries, Ltd. ("Kawasaki") is subject to preferential rate of 10 percent pursuant to Article 10 (3) 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"). It is represented that Kawasaki , with address at 1-1, Higashikawasaki-cho 3-chome, Chuo-ku, Kobe, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per the Certificate of Domicile issued by the District Director of Kobe Tax Office dated July 5, 2013; 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 July 16, 2013; and that, on the other hand, Keppel , with principal address at Cabangaan Pt., Cawag, Subic, Zambales 2209 is a corporation registered with the Philippine Economic Zone Authority (PEZA) under Amended Certificate of Registration No. 96-003 issued on April 19, 2011 . It is further represented, that at the regular meeting of the Board of Directors of Keppel on June 19, 2013, the Board of Directors approved the payment of cash dividend out of the unrestricted retained earnings of Keppel as of December 31, 2012, to all stockholders of record as of July 10, 2013, in the amount of Php204,604,421.40, to be paid on or before July 31, 2013, on the basis of the amount of stocks held by them; that based on the Corporate Secretary's Certificate of Keppel issued on August 2, 2013, Kawasaki has a total of 78,404,971 subscribed and paid shares which is equivalent to Php78,404,971.00 representing 7.66 percent of the total issued and outstanding shares of Keppel ; that Kawasaki has acquired Keppel shares on various dates starting April 21, 1994 through purchase and subscription; and that, based on Debit/Credit Memo issued by Metrobank, an amount of USD305,819.69 was remitted by Keppel to Kawasaki through telegraphic transfer on August 15, 2013. HSTAcI It is finally represented, per Sworn Statement dated July 19, 2013 issued by Keppel , 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. 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 derived in the Philippines 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, 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. DCcIaE 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. 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 derived in the Philippines by a resident of Japan are subject to a preferential rate of 10 percent in two instances, 1) 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, and 2) if the dividends are paid by a resident of the Philippines registered with the BOI and engaged in preferred areas of investment under the investment incentives laws of the Philippines. In view thereof and considering that Kawasaki holds only 7.66 percent common shares in Keppel , which is less than the required minimum 10 percent shareholdings to be entitled to the 10 percent preferential rate, and that Keppel is not registered with the BOI, this Office is of the opinion as it hereby holds that the dividends derived by Kawasaki from Keppel are subject to the 15 percent preferential tax rate, pursuant to the Article 10 (2) [b] of the Philippines-Japan tax treaty, as amended. DTAHSI 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