ITAD BIR Ruling No. 051-14

May 15, 2014 ITAD BIR RULING NO. 051-14 Article 10 (Dividends), Philippines-Japan tax treaty Tsuneishi Holdings (Cebu), Inc. West Industrial Park-Special Economic Zone Buanoy, Balamban Cebu 6041 Attention: Hitoshi Kono President Gentlemen : This refers to your tax treaty application ("TTRA") filed on July 10, 2013, requesting confirmation that dividend paid by Tsuneishi Holdings (Cebu), Inc. ("Tsuneishi-Cebu") to Tsuneishi Holdings Corporation ("Tsuneishi-Japan") is subject to income tax at the rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by the 2009 Protocol ("Philippines-Japan tax treaty") . It is represented that Tsuneishi-Japan is a foreign corporation organized and existing under the laws of Japan with business address at 1083 Tsuneishi Numakuma-cho, Fukuyama City, Hiroshima-Prefecture, Japan; that it is not registered as a corporation or partnership in the Philippines per certificate of non-registration of company issued by the Securities and Exchange Commission; and that, on the other hand, Tsuneishi-Cebu is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at West Cebu Industrial Park-Special Economic Zone, Buanoy, Balamban, Cebu 6041. It is also represented that Tsuneishi-Japan is the registered owner of Eight Hundred Twenty-Five Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Five (825,999,995) common shares as of June 30, 2013 and July 31, 2013, constituting 99.99% of the issued and outstanding shares of Tsuneishi-Cebu ; that these shares were acquired by Tsuneishi-Japan as follows: DEScaT Acquisition Date Mode of Acquisition No. of shares August 25, 1993 Original Subscription 36,249,995 September 27, 1994 Additional Subscription 4,000,000 May 23, 1995 Additional Subscription 12,000,000 July 2, 1997 Additional Subscription 82,400,000 June 27, 1998 Additional Subscription 10,350,000 September 8, 1998 Additional Subscription 24,850,000 September 8, 2008 Stock Dividends 290,000,000 August 17, 2009 Tax Free Exchange 344,500,000 March 29, 2010 Tax Free Exchange 8,696,876 December 29, 2011 Stock Dividends 12,953,124 Total 825,999,995 ========== It is also represented that on July 1, 2013 the Board of Directors of Tsuneishi-Cebu declared cash dividends in the total amount of Two Hundred Eighty Million Eight Hundred Sixty Thousand Pesos (Php280,860,000.00) out of its accumulated and unrestricted retained earnings as of December 31, 2012; that on July 29, 2013, Tsuneishi-Cebu through RCBC paid Tsuneishi-Japan the amount of JPY572,534,543.00 per bank certification issued on July 29, 2013. It is further represented, per sworn certification issued on July 9, 2013 by the President of Tsuneishi-Cebu that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to Tsuneishi-Japan are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, dividends . . . subject to tax under subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" However, under Section 32 (B) (5) of the Tax Code, these 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: aDECHI "SEC. 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." For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 1, 2, & 3 of 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." TaHDAS Under paragraphs 2 and 3 of Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not exceeding (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, the dividend paid by Tsuneishi-Cebu to Tsuneishi-Japan is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) Tsuneishi-Japan holds 825,999,995 common shares constituting 99.99 percent of the total shares of Tsuneishi-Cebu , which is more than ten percent (10%) of the capital of Tsuneishi-Cebu ; and (2) Tsuneishi-Japan holds the said shares during the period of 6 months immediately preceding the date of payment of the dividends or since December 29, 2011. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue