ITAD BIR Ruling No. 044-10

October 5, 2010 ITAD BIR RULING NO. 044-10 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. 087-83; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Atty. Rolando P. Nonato Rm 406 Tulips Center, A.S. Fortuna Street Bakilid, Mandaue City Cebu City Gentlemen : This refers to your letter dated March 18, 2008, on behalf of your client Makoto Light Metal Co., Ltd. (Makoto-Japan), requesting confirmation of your opinion that the cash dividends received from Philippine Makoto Corporation (Makoto-Phil), are subject to the ten percent (10%) withholding tax pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. It is represented that Makoto-Japan is a corporation organized and existing under the laws of Japan with principal address at 3-13-56 Kamimuneoka Shiki City Saitama Japan per certification dated April 14, 2008 of Mr. Yasuhiro Nakayama, District Director of Asaka Tax Office; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 25, 2008; that Makoto-Phil is a Philippine Economic Zone Authority (PEZA)-registered corporation organized and existing under the laws of the Philippines with principal address at 4th Street, 3rd Avenue, MEPZ I, Lapu-lapu City, Cebu. It is further represented that Makoto-Japan is the major stockholder and parent company of Makoto-Phil and owns 99.99% of the capital stocks of Makoto-Phil as of July 6, 2006, the date of declaration of the cash dividends by Makoto-Phil, and six (6) months preceding such date per Secretary's Certificate issued by Makoto-Phil dated March 17, 2008; that on July 7, 2006 the Board of Directors of Makoto-Phil declared a cash dividend amounting to P12,000,000.00 to be taken out of the accumulated unrestricted retained earnings or surplus profit of the corporation as of fiscal year ended June 30, 2005 in favor of the stockholders of record as of the same date per a duly certified true copy of the Board Resolution dated July 7, 2006; that the dividend was paid and remitted to Makoto-Japan on July 14, 2006 per Secretary's Certificate issued by Makoto-Phil dated January 22, 2010; and 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 Statement issued by Makoto-Phil dated April 2, 2008. HEcaIC 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 income received by a nonresident foreign corporation which 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 . . ., dividends, . . .: 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, 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 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." cAIDEa Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10% if the last-mentioned company holds directly at least twenty-five percent (25%) 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. In view thereof and considering that Makoto-Japan is a major stockholder of Makoto-Phil with a shareholding of 99.99% for a period of 6 months immediately preceding the date of payment, said dividends paid by Makoto-Phil to Makoto-Japan are subject to 10% preferential tax rate, pursuant to the Philippines-Japan tax treaty. (BIR Ruling No. ITAD 008-99 dated July 20, 1999; BIR Ruling No. ITAD 020-99 dated August 18, 1999; BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD 041-99 dated November 3, 1999; BIR Ruling No. ITAD 047-99) 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