ITAD BIR Ruling No. 051-11

February 11, 2011 ITAD BIR RULING NO. 051-11 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 87-83; BIR Ruling No. ITAD-20-99; BIR Ruling No. ITAD-8-99; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10 Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Balikid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Legal Counsel Gentlemen : This refers to your letter dated September 19, 2009, on behalf of MARUEMU DIECAST CO. LTD. (hereinafter referred to as "MDCL"), requesting for a ruling confirming that the cash dividends received by MDCL from MAKOTO METAL TECHNOLOGY, INC. (hereinafter referred to as "MMTI") are subject to the 10 percent withholding tax pursuant to Article 10 (2) (a) of 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 (hereinafter referred to as the "Philippines-Japan tax treaty" ). It is represented that MDCL, founded on July 1980 and with address at 3-13-56 Kamimuneoka Shiki City, Saitama, is a resident of Japan and subject to taxation in Japan under Tax ID No. 00602655, per Certification by the Tax Authorities of the Country of Residence issued by the District Director of Asaka Tax Office, Tokyo dated August 26, 2009; that MDCL 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 Philippine Securities and Exchange Commission dated August 26, 2009; that MMTI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal office at Phase 1, Lots 4 A & B, Block 5, MEPZ II, Basak, Lapulapu City, Cebu; that it is duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 00-015 dated February 23, 2000; that MMTI has a total subscribed and paid-up common shares of 130,000 at P100.00 par value equivalent to the amount of P13,000,000.00; that out of the said total subscribed and paid-up shares of MMTI, MDCL has subscribed and paid-up common shares of 116,995 equivalent to P11,699,500.00 or 90% of the outstanding capital stock of MMTI, as shown in the certified true copy of the General Information Sheet of MMTI for the year 2009 filed with the SEC on January 15, 2009. It is further represented that during a special meeting of the Board of Directors of MMTI on August 15, 2008 , it was resolved that an amount of P8,300,000.00 be declared as cash dividends to be taken out of the accumulated unrestricted and unappropriated retained earnings or surplus profit of MMTI as of fiscal year ended September 30, 2007, in favor of stockholders of record as of the same date, per certified copy of the Board Resolution dated August 15, 2008; that in another special meeting of the same Board of Directors on April 13, 2009 , another resolution was made declaring an amount of JPY10,000,000.00 (P4,788,000.00) as cash dividends to be taken out of the accumulated unrestricted and unappropriated retained earnings or surplus profit of the MMTI as of fiscal year ended September 30, 2008 in favor of the stockholders of record as of the same date, per certified copy of the Board Resolution dated April 13, 2009; that, as certified by the Corporate Secretary of MMTI on January 22, 2010, the cash dividends declared on April 13, 2009 in the amount of JPY10,000,000.00 in favor of MDCL were paid and remitted to the latter on April 15, 2009; and that, as further certified by the Corporate Secretary of MMTI on October 28, 2010, the cash dividends declared on August 15, 2008 in the amount of P8,300,000.00 were paid and remitted to MDCL on August 19, 2008. IEaHSD It is finally represented, per certification by the Corporate Secretary of MMTI dated August 11, 2009, that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : "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 NIRC of 1997, as amended, provides, viz. : "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 accordance with the foregoing, Article 10 of the Philippines-Japan tax treaty may apply to the subject request for ruling. It provides, viz. : "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. 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. 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. CSIDEc xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent of the gross amount of dividends if the latter holds at least 25 percent either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25 percent preferential tax rate shall apply. In relation thereto, a 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 took effect on January 1, 2009, Article III of which reads as follows: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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." Under the Protocol, the minimum shareholding requirement for the application of the 10 percent preferential tax rate on dividends was reduced from 25 percent to 10 percent; and the maximum preferential tax rate of 25 percent which applies to dividends in all other cases was reduced to 15 percent. In view thereof, and considering that during the period of six months immediately preceding the date of payment of the dividends on August 19, 2008, MDCL owns more than the 25 percent minimum shareholdings of the outstanding voting stocks of MMTI required under Article 10 (2) (a) of the Philippines-Japan tax treaty prior to its amendment, the cash dividends paid to MDCL by MMTI on August 19, 2008 are subject to the 10 percent preferential tax rate. (BIR Ruling No. 87-83 dated May 17, 1983; BIR Ruling No. ITAD-20-99 dated August 18, 1999; BIR Ruling No. ITAD-8-99 dated July 20, 1999) Moreover, insofar as the dividend payments on April 15, 2009, since during the period of six months immediately preceding April 15, 2009, MDCL owns more than the 10 percent minimum required shareholdings of the outstanding voting stocks of MMTI required under Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended, the cash dividends paid to MDCL by MMTI are, likewise, subject to the 10 percent preferential tax rate. (BIR Ruling No. ITAD-07-10 dated May 20, 2010; BIR Ruling No. ITAD-08-10 dated June 03, 2010; BIR Ruling No. ITAD-11-10 dated June 16, 2010) 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, then this ruling shall be without force and effect insofar as the herein parties are concerned. cCEAHT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue