ITAD BIR Ruling No. 043-12

February 9, 2012 ITAD BIR RULING NO. 043-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 35-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 8-10; BIR Ruling No. ITAD 7-10 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Managing Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application dated July 27, 2011, on behalf of Toyota Tsusho Corporation ("TTC"), requesting confirmation of your opinion that dividends received by TTC from Toyota Boshoku Philippines Corporation ("TBPC") are subject to the preferential tax rate of 15 percent 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 (hereinafter referred to as the "Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. Facts It is represented that TTC 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, based on its Articles of Incorporation and on the Certificate of Residence issued by the Tax Authority of Japan; that TTC is situated in No. 9-8, Meieki 4-chome, Nakamura-ku, Nagoya, Japan; that TTC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated July 14, 2011; and that, on the other hand, TBPC is a corporation organized and existing under the laws of the Philippines with office address at 111 Commercial Road, Phase 2, Industrial Zone, Laguna Technopark, Bian, Laguna, Philippines. It is further represented that on June 27, 2011, the Board of Directors of TBPC, duly approved a resolution declaring cash dividends amounting to P32,487,167.00 for all common stockholders of record as of June 27, 2011, payable on August 31, 2011; that as of June 27, 2011, TTC holds 63,500 shares in TBPC representing 5% percent of the total issued and outstanding capital stock of the entire capital stock of TBPC, based on the Certificate issued by the same Corporate Secretary on July 18, 2011. IaTSED It is finally represented that the dividends subject of the request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Certificate issued by the General Manager of TBPC on July 19, 2011. Ruling In reply, please be informed that dividends derived by a nonresident foreign corporation are taxable generally under Section 28, (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, which provides: "SEC. 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 interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such dividends may be exempt (or partially exempt) from income tax pursuant to a treaty obligation to which the Philippine government is bound. 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: 1 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." With respect to a tax treaty, Article 10 of the Philippines-Japan tax treaty, as amended, 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. 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." Under paragraph 2 above, the Philippines may tax dividends paid by a domestic company to a company resident of Japan at a rate not exceeding 10 percent of the gross amount thereof if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. Otherwise, a rate of 15 percent applies. In view of the foregoing, considering that, as of June 27, 2011, TTC holds merely 5 percent of the total issued and outstanding capital stock of the entire capital stock of TBPC, such dividends to be paid by TBPC to TTC are subject to the preferential tax rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (b), 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 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. TITLE II TAX ON INCOME.