ITAD BIR Ruling No. 055-10

October 22, 2010 ITAD BIR RULING NO. 055-10 Article 10, Philippines-Japan tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 087-83; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Rohm Electronics Philippines, Inc. People's Technology Complex Special Economic Zone Carmona, Cavite 4116 Philippines Attention: Kunihiko Tsuru President Gentlemen : This refers to your letter dated July 2, 2007 requesting confirmation that the dividend remittances of Rohm Electronics Philippines, Inc. (Rohm Philippines) to Rohm Fukuoka Company, Ltd. (Rohm Fukuoka) are subject to the 10 percent preferential tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Rohm Fukuoka is a nonresident foreign corporation duly organized and existing under the laws of Japan with business address at 837-1, Hatakeda, Inado, Yukuhashi, Fukuoka 824-8555, Japan; 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 June 12, 2007; that Rohm Philippines is a domestic corporation with office address at People's Technology Complex, Special Economic Zone, Carmona, Cavite 4116, Philippines. It is further represented that as of July 10, 2007 Rohm Fukuoka is the registered owner of Eight Million Sixty-Eight Thousand Nine Hundred Fifty-Nine (8,068,959) common shares with par value of One Hundred Pesos (PhP100.00), amounting to Eight Hundred Six Million Eight Hundred Ninety-Five Thousand Nine Hundred Pesos (PhP806,895,900.00), representing 66.05% ownership in Rohm Philippines as shown in the certification issued by the Assistant Corporate Secretary of Rohm Philippines dated February 13, 2008; that from the date of acquisition of the shares upon incorporation of Rohm Philippines on August 8, 1991 until June 14, 2007, Rohm Fukuoka has accumulated 66.05% ownership of the subscribed capital stock of Rohm Philippines ; that on June 14, 2007, the Board of Directors of Rohm Philippines declared cash dividends in the amount of Forty-Five Million One Hundred Fifty Thousand US Dollars (US$45,150,000.00) to be taken out from the unrestricted retained earnings of Rohm Philippines , payable to all stockholders of record as of March 31, 2007, and was actually paid on July 10, 2007; and that subject of the above 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 taxpayer/s involved. ECSaAc 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 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 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-Japan tax treaty which, in its Article 10, 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. ADaEIH 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. xxx xxx xxx" Based on the aforequoted provisions, 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 of the Philippine Company 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 on gross dividends shall apply. Considering that as of May 8, 2006, Rohm Fukuoka has Eight Million Sixty-Eight Thousand Nine Hundred Fifty-Seven (8,068,957) shares which represents 66.05% of the outstanding capital stock of Rohm Philippines, as shown in the Certification issued by the Corporate Secretary of Rohm Philippines dated February 13, 2008, which shows that Rohm Fukuoka holds at least 25 percent of the total shares of Rohm Philippine during the period of 6 months immediately preceding the date of payment of the dividends on July 10, 2007, this Office is of the opinion and so holds that the dividend payments made by Rohm Philippines to Rohm Fukuoka are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD-008-99 dated July 20, 1999; BIR Ruling No. ITAD-020-99 dated August 18, 1999; BIR Ruling No. ITAD-041-99 dated November 3, 1999; and BIR Ruling No. ITAD-047-99 dated December 9, 1999.) This ruling is issued based on 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