ITAD BIR Ruling No. 045-15

March 25, 2015 ITAD BIR RULING NO. 045-15 Article 10, Philippines-Japan tax treaty Buag & Lotilla Law Offices Suites A&B, 10th Floor Strata 100 Building F. Ortigas, Jr. Road (Formerly Emerald Avenue) Ortigas Center, Pasig City Attention: Jose Mario C. Buag Gay Christine C. Cortes Gentlemen : This refers to your tax treaty relief application filed on April 16, 2012, on behalf of your client Mitsubishi Motors Philippines Corporation ("Mitsubishi Philippines"), requesting conformation that the dividends payment from Mitsubishi Philippines to Mitsubishi Motors Philippines Corporation ("Mitsubishi Japan") and Sojitz Corporation ("Sojitz") are subject 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 by a Protocol 1 ("Philippines-Japan tax treaty"). Facts It is represented that Mitsubishi Japan and Sojitz are foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Shiba Tax Office on January 27, 2012 and Azabu Tax Office both in Japan, respectively; that Mitsubishi Japan is situated at 33-8, Shiba 5-chome, Minato-ku, Tokyo, Japan; that Sojitz is situated at 1-20 Akasaka 6-chome, Minato-ku, Tokyo, Japan; that Mitsubishi Japan and Sojitz are not registered as corporation in the Philippines per certification issued by the Securities and Exchange Commission dated February 29, 2012; and that, on the other hand, Mitsubishi Philippines is a corporation organized and existing under the laws of the Philippines with principal address at Ortigas Avenue Extension, Cainta, Rizal, Manila; and that according to a certified true copy of Board of Investments (BOI) registration dated July 30, 2012, Mitsubishi Philippines, is registered with BOI under Certificate of Registration No. 93-006 (CVDP) dated July 10, 1997, as a participant in Category II of the Car Development and Category V of the Commercial Vehicle Development Program effective as of August 23, 1996. On December 23, 2011, as shown in the Secretary's Certificate issued by the Corporate Secretary, during the special meeting of the Board of Directors of Mitsubishi Philippines, authorized and approved the declaration of cash dividend P81.00 per share cash dividends equivalent to One Billion Two Hundred Fifty Five Million Two Hundred Ninety Five Thousand Three Hundred Thirteen Pesos (P1,255,295,313.00) out of the unrestricted retained earnings as of December 31, 2010, payable to stockholders on record as of December 31, 2011; that following are the stockholdings of Mitsubishi Japan and Sojitz common share to Mitsubishi Philippines : Name of Subscribed Mode of Acquisition Date Percentage stockholder number of Acquisition of Shares Ownership Mitsubishi 7,903,708 Original March 14, 2000 51% Japan Subscription and Stock SOJITZ 7,593,759 Dividends 49% CORPORATION Original Subscription 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 Sworn Statement issued by Mitsubishi Philippines dated March 2, 2012. AcICTS Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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 this particular case, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. xxx xxx xxx" Under paragraph 3 of Article 10 above, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at the rate not to exceed 10 percent of the gross amount of the dividends if the dividends are paid by a company, being a resident of the Philippines, registered with the BOI and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines. ACIDTE In view thereof and considering that Mitsubishi Philippines is a domestic corporation registered with the BOI, such dividends paid by Mitsubishi Philippines to Mitsubishi Japan and Sojitz are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (3) of the Philippines-Japan tax treaty. 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.