ITAD BIR Ruling No. 042-15

March 23, 2015 ITAD BIR RULING NO. 042-15 Article 10 of the Philippines-Japan tax treaty Sun Pioneer, Inc. Sitio Aratan, Brgy. Pulong, Sta. Cruz Santa Rosa, Laguna Philippines Attention: Mr. Kenji Ueda Director Ms. Jeannette F. Pingol Accounting-Asst. Manager Gentlemen: This refers to your tax treaty relief application dated May 26, 2010, requesting relief from double taxation, which were filed on behalf of SAN EI INDUSTRY, LTD. ("SAN EI"), from its dividends income receive from SUN PIONEER, INC. ("SPI"), which will be subject to preferential tax rate 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, 1 ("Philippine-Japan tax treaty") Facts It is represented that SAN EI is a corporation organized and existing under the laws of Japan with office address at 10 Higashiura, Takaoka-cho, Toyota City, Aichi Ken, Japan per Residence Certificate dated June 14, 2010 issued by District Director Kouichi Sato of Toyota Tax Office; that SAN EI is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 27, 2010; that SPI is a corporation organized and existing under the laws of the Philippines with principal address at Sitio Aratan, Brgy. Pulong, Sta. Cruz, Santa Rosa, Laguna. It is further represented that, on April 6, 2010, the Board of Directors of SPI declare cash dividends amounting to P438,997.14 all common stockholders of records as of December 31, 2009, in proportion to their respective stockholdings as of such date payable on or before May 31, 2010; that as of January 27, 2010 SPI confirms SAN EI stockholdings as follows: Type of Number Par Value Mode of Date of Percentage of Ownership of Shares of Shares Acquisition Acquisition the entire stockholdings of SPI Common 18,600 P2,000.00 Subscription December 40% 23, 1997 It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Affidavit issued by the of SPI dated August 10, 2010. Ruling 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 dividend income received by a nonresident foreign corporation which 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." DHSACT However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. (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." Thus, 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 3. 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. 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." 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 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 thereof. Accordingly, considering that SAN EI holds directly 40% percent of the total shares of stock of SPI during the period of six months immediately preceding the date of payment of the dividends (since December 23, 1997), such dividends paid by SPI to SAN EI 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 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. Protocol Amending 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.