ITAD BIR Ruling No. 045-11

February 11, 2011 ITAD BIR RULING NO. 045-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-60-10 Team Energy Corporation CTC Building 2232 Roxas Boulevard Pasay City 1300 Attention: Kazunobu Takijima VP-Controller Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on December 13, 2010 requesting confirmation that the dividends to be received by Marubeni Corporation ("Marubeni-Japan") [formerly MARUBENI-IIDA CO., LTD.] 1 from Team Energy Corporation ("TEC") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) 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 Marubeni-Japan, with address at 4-2 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, 100-8088 Japan, is a resident of Japan for the purpose of the Philippines-Japan tax treaty as certified by the District Director of Kojimachi Tax Office on October 8, 2010; that it is a corporation organized and existing under the laws of Japan based on its Articles of Incorporation; that it was licensed to engage in business in the Philippines per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated June 28, 2010; that per Certification issued by Marubeni-Philippine Branch dated January 10, 2011, Marubeni-Philippine Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office of shares in TEC, and that the income derived by Marubeni-Japan from its investment in TEC is neither attributable to Marubeni-Philippine Branch nor paid or coursed through the latter, since any dividend income derived from the said investment is directly recorded in the books of Marubeni-Japan; that such income which is derived by Marubeni-Japan from its investment in TEC is neither connected with, nor resulting from the ordinary course of trade or business of Marubeni-Philippine Branch, and that the investment of Marubeni-Japan in TEC or the dividends derived therefrom are neither used nor held for use in the conduct of trade or business of Marubeni-Philippine Branch. It is further represented, based on Secretary's Certificate issued by TEC dated December 10, 2010, that as of December 10, 2010, Marubeni-Japan has a shareholding of 16,534,176 shares in TEC representing 50% of the outstanding shares of the latter; that in a meeting held also on December 10, 2010, the Board of Directors of TEC approved the declaration of dividend in the amount of US$56,000,000.00, payable to all stockholders of record of TEC as of December 10, 2010; and that Marubeni-Japan held its shares in TEC for a period of at least six (6) months immediately preceding the payment of the said dividends which is on or before December 31, 2010. DTAHSI It is finally represented that the 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 Secretary's Certificate issued by TEC dated December 10, 2010. 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 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." The provisions of 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. 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. DEcTIS 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." 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 of 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 in all other cases. In view thereof and considering that Marubeni-Japan holds more than 10 percent of shareholdings in TEC for a period of 6 months immediately preceding the date of payment of the dividends, said dividends paid by TEC to Marubeni-Japan based on the resolution adopted by the Board of Directors in a special meeting held on December 10, 2010, are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-60-10 dated November 3, 2010) Finally, in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) , it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, the profits of a corporation which is a resident of Japan are taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever directly or indirectly, in Marubeni-Japan's investment in TEC, and that the income derived by Marubeni-Japan from the said investment is neither attributable to the branch nor paid or coursed through the latter since any payment is directly remitted to Marubeni-Japan. Hence, income derived through the payment of dividends by TEC to Marubeni-Japan shall be considered as income of Marubeni-Japan as ruled in the aforesaid Marubeni case. 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. aTSEcA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Based on a copy of Certificate of Filing of Certificate of Corporate Filing/Information, issued by the Philippine Securities and Exchange Commission dated June 28, 2010.