ITAD BIR Ruling No. 054-15

March 25, 2015 ITAD BIR RULING NO. 054-15 Article 10 of the Philippines-Japan tax treaty Sun Logistics Technology, Inc. Sitio Aratan, Brgy. Pulong, Sta. Cruz Santa Rosa, Laguna Philippines Attention: Mr. Kenji Ueda Director Ms. Jeannette F. Pingol Accounting-Asst. Manager Gentlemen : This refers to your tax treaty relief application filed on May 26, 2010, on behalf of SAN EI INDUSTRY, LTD. ("SAN EI") and MITSUI & Co., LTD. ("MITSUI"), requesting confirmation that the dividend payments of Sun Logistics Technology, Inc. ("SLTI") , to SAN EI and Mitsui are subject to the preferential tax rate of 10 percent pursuant to Article 10 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 ("Philippines-Japan tax treaty") , as amended by a Protocol . 1 Facts It is represented that SAN EI is a corporation organized and existing under the laws of Japan with office address at 10 Higashiura, Takaoka-cho, Toyota City, Aichi Ken, Japan, as evidence by the Residence Certificate dated June 14, 2010 issued by District Director Kouichi Sato of Toyota Tax Office; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 27, 2010; that MITSUI is a corporation organized and existing under the laws of Japan with office address at 2-1 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, Japan evidenced by the Residence Certificate dated June 14, 2010 issued by District Director Kouichi Sato of Toyota Tax Office; that MITSUI is licensed to engage in business in the Philippines per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated November 21, 2006; that per Certification issued by MITSUI-Manila Branch dated August 19, 2011, MITSUI-Manila Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office of shares in SLTI, and that the income derived by MITSUI from its investment in SLTI is neither attributable to MITSUI-Manila Branch nor paid or coursed through the latter, since any dividend income derived from the said investment is directly recorded in the books of MITSUI; that such income which is derived by MITSUI from its investment in SLTI is neither connected with, nor resulting from the ordinary course of trade or business of MITSUI-Manila Branch, and that the investment of MITSUI in SLTI or the dividends derived therefrom are neither used nor held for use in the conduct of trade or business of MITSUI-Manila Branch; and on the otherhand, SLTI is a corporation organized and existing under the laws of the Philippines with principal address at Sitio Aratan, Brgy. Pulong, Sta. Cruz, Santa Rosa, Laguna. It is further represented that, on April 6, 2010, the Board of Directors of SLTI declare cash dividends amounting to P12,000,000.00 to be distributed in favor of all its stockholders of record, in proportion to their respective equity holdings and shall be payable on or before May 31, 2010; that per Corporate Secretary Certificate dated October 22, 2014 SLTI confirms SAN EI and MITSUI stockholdings are as follows: Particulars Number Par Mode of Date of Acquisition Percentage of Value Acquisition of Shares Ownership SAN EI 720,000 P100.00 Subscription August 18, 2009 60% MITSUI 120,000 P100.00 Subscription November 19, 1996 10% 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 Affidavit issued by the of SLTI dated August 10, 2010. TAESDH Ruling 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 dividend income received by a nonresident foreign corporation which provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. (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." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, 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. 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a 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. However, under paragraph 5 of Article 10, the Philippines, being the source of the dividends, is not obliged to limit the tax rates on dividends under paragraphs 2 and 3 of the article if the holding in respect of which the dividends are paid is effectively connected with a permanent establishment which MITSUI has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, MITSUI-Manila Branch, is considered a permanent establishment of MITSUI, thus: HcSDIE "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. . . . " (Underscoring ours) On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010 p. 193) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: " 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , dividends derived by a foreign corporation can become effectively connected with its branch office in the Philippines if the business activities that give rise to such dividends are conducted through the branch office, following the principal-agent relationship theory, thus: " 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 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 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." (Underscoring supplied) Accordingly, the holdings in respect of the dividends paid by SLTI to MITSUI are not effectively connected with MITSUI-Manila Branch since they are paid not in respect of holdings forming part of the assets of MITSUI-Manila Branch or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through MITSUI-Manila Branch. This is because MITSUI-Manila Branch has neither investments nor owns shares of stock in SLTI; does not use or hold for use in the conduct of its trade or business any shares of stock in SLTI; MITSUI acquired such shares in SLTI directly and without the participation of MITSUI-Manila Branch; and, dividends arising from these shares inure solely to the benefit of MITSUI and MITSUI-Manila Branch did not receive any of these dividends. Hence, MITSUI-Manila Branch is not a material factor in the realization of dividends received by the Marubeni-Japan . In view thereof and considering that MITSUI and SAN EI holds 10 and 60% percent, respectively of the shareholdings in SLTI for a period of more than 6 months (November 19, 1996 and August 18, 2009, respectively) immediately preceding the date of payment of the dividends, said dividends paid by SLTI to MITSUI and SAN EI, are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. 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.