ITAD BIR Ruling No. 044-14

April 14, 2014 ITAD BIR RULING NO. 044-14 Article 10, Philippines-Japan tax treaty, as amended SCS Global Business Solutions, Inc. 14 F Makati Sky Plaza 6788 Ayala Avenue Makati City Attention: Tatsuya Koide Representative Gentlemen : This refers to your tax treaty relief application filed on August 1, 2012, on behalf of S.T. Sangyo Co. Ltd. ("Sangyo") for a confirmation that dividend payment made by Cresc Incorporated ("Cresc") to Sangyo is subject to 10 percent preferential tax rate pursuant to 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 Sangyo , with address at 1-8-1 Hatchobori Chuo-Ku, Tokyo, Japan, is a resident of the Japan per Certificate of Residence issued by the District Director of Kyobashi Tax Office on June 20, 2012; that Sangyo is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 13, 2012; and that Cresc , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 24 Innovative St., Subic Bay Industrial Park, Phase 1, Subic Bay Freeport, Olongapo City. It is also represented, per Secretary's Certificate dated June 18, 2012 that Sangyo is the registered owner of 129,998 common shares of stock amounting to Php6,109,859.00 which constitutes 52% of the total subscribed stock of Cresc ; and that these shares were acquired by Sangyo thru original subscription on May 10, 2007. It is further represented, that at the special meeting of the Board of Directors of Cresc on April 20, 2012, the Board declared cash dividend amounting to US$200,000.00; that out of the US$200,000.00 cash dividend, an amount of US$103,998.40 shall be released by Cresc to Sangyo ; and that, finally, dividend in the amount US$493,600.96 was remitted by Cresc to Sangyo on September 27, 2012 per Certificate of Remittance from Bank of Tokyo-Mitsubishi UFJ dated August 23, 2013. TIcAaH It is finally represented, based on the Certification issued by Cresc on June 18, 2012, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . . dividends, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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" In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: IcCDAS "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. 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. xxx xxx xxx" Based on the foregoing, 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 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. This being the case, inasmuch as Sangyo holds directly 52% of the outstanding capital stock of Cresc (which in fact exceeds the minimum required percentage of holding of 10 percent), and since Sangyo has maintained such shareholdings since May 10, 2007, and, in effect, more than six months immediately preceding the date of payment of the dividend, such dividend paid by Cresc to Sangyo is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. DEHaTC 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