ITAD BIR Ruling No. 049-10

October 8, 2010 ITAD BIR RULING NO. 049-10 Article 10 (2) (a), Philippines-Singapore tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 010-84; BIR Ruling No. ITAD-082-02; BIR Ruling No. DA-ITAD-024-08; BIR Ruling No. DA-ITAD-058-08; BIR Ruling No. DA-ITAD-079-08 Takata (Philippines) Corporation 106 East Main Avenue Special Ecozone, Laguna Technopark Bian, Laguna 4024 Philippines Attention: Elizabeth Torres Finance Manager Gentlemen : This refers to your letter dated March 25, 2008 requesting confirmation of your opinion that the dividend payments by Takata (Philippines) Corporation (Takata Philippines) to Takata Asia Pte. Ltd. (Takata Singapore) are subject to the preferential tax rate of 15 percent pursuant to Article 10 of the Philippines-Singapore tax treaty. ASTcaE It is represented that Takata Singapore with address at 101 Thompson Road # 07-08 Singapore 098632 is a resident of Singapore within the meaning of Article 4 of the Philippines-Singapore tax treaty, per Certification dated March 4, 2008 issued by the Inland Revenue Authority of Singapore; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated February 21, 2008 issued by the Securities and Exchange Commission; that Takata Philippines is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at 106 East Main Avenue, Special Ecozone, Laguna Technopark, Bian, Laguna 4024, Philippines. It is further represented that based on a Certification dated April 23, 2008, issued by the Corporate Secretary of Takata Philippines , that as of March 31, 2004, Takata Singapore has Five Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety (5,999,990) subscribed and paid up shares of Takata Philippines , with a par value of One Hundred Peso (PhP100.00) per share, amounting to Five Hundred Ninety-Nine Million Nine Hundred Ninety-Nine Thousand Pesos (PhP599,999,000.00), representing 99.99% of the total subscribed and voting stock of Takata Philippines ; that the Board of Directors of Takata Philippines declared the following cash dividends: 1.) on March 1, 2005 declared Six Hundred Million Pesos (PhP600,000,000.00) in favor of Takata Singapore, payable to the stockholders of record as of March 5, 2005 payable on or before March 31, 2005; 2.) on March 20, 2006 declared Two Billion Four Hundred Million Pesos (PhP2,400,000,000.00) in favor of Takata Singapore, payable to the stockholders of record as of March 1, 2006, 50% payable on or before 31 March 2006 and the balance to be paid on or before 31 March 2007; and 3.) on March 5, 2007 declared Thirteen Million Three Hundred Fifty Thousand One Hundred US Dollar (US$13,350,100.00) and Seven Million Six Hundred Eighty Thousand Eight Hundred Twenty-Eight US Dollars (US$7,680,828.00) in favor of Takata Singapore, payable to the stockholders of record as of March 5, 2007, payable on or before March 31, 2007. It is finally represented that the issues or transactions subject of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer involved. 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. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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%). cIHCST 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 this particular case, the treaty involved is the Philippines-Singapore tax treaty which, in its Article 10, provides: "Article 10 DIVIDENDS 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 State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. HIETAc The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the above-cited provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient is a company and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year, if any, at least 15 percent of the outstanding shares of the voting stock of the paying company was owned by the recipient company. In all other cases, the 25 percent preferential tax rate applies. In the instant case, considering that Takata Singapore holds 99.99% of the total subscribed and voting stock capital of Takata Philippines , this Office is of the opinion and so holds that the dividend payments by Takata Philippines to Takata Singapore shall be subject to the preferential tax rate of 15 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. 010-84 dated January 19, 1984; BIR Ruling No. ITAD-082-02 dated May 2, 2002; BIR Ruling No. DA-ITAD-024-08 dated April 9, 2008; BIR Ruling No. DA-ITAD-058-08 dated August 11, 2008; and BIR Ruling No. DA-ITAD-079-08 dated October 29, 2008.) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, the this ruling shall be without force and effect insofar as the herein parties are concerned. cEAaIS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue