ITAD BIR Ruling No. 057-10

October 22, 2010 ITAD BIR RULING NO. 057-10 Article 10 Philippines-Japan tax treaty; BIR Ruling No. ITAD 7-10; BIR Ruling No. ITAD 8-10 Platon Martinez Flores San Pedro & Leao Law Offices 6th Floor, Tuscan Building 114 V.A. Rufino Street, Legaspi Village 1226 Makati City Attention: Atty. Carlos G. Platon Atty. Anthony Brett M. Abenir Gentlemen : This refers to your letter dated March 4, 2009 requesting confirmation that dividends to be paid by Yokohama Tire Sales Philippines, Inc. ("Yokohama Tire Philippines") to Yokohama Rubber Company, Ltd. ("Yokohama Rubber Company") are subject to income tax in the Philippines at the rate of 10 percent pursuant to 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") , 1 as amended by the 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 , signed on December 9, 2006, and effective January 1, 2009. Basic Facts It is represented that Yokohama Rubber Company is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on its Articles of Incorporation and on its Certificate of Status of Taxable Person issued by the Shiba Tax Office in Japan on February 25, 2009; that Yokohama Rubber Company is situated at 36-11, Shimbashi, 5-Chome, Minato-ku, Tokyo, Japan; that Yokohama Rubber Company is engaged primarily in the manufacture and sale of tires, tubes, industrial rubber products, other kinds of rubber products, plastic products, chemical products, metallic products, and sporting goods, among others; and that Yokohama Rubber Company is not registered as a corporation or as a partnership in the Philippines, based on its Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on February 16, 2009; that, on the other hand, Yokohama Tire Philippines is a domestic corporation situated at Unit A2, First Midland Building, 109 Gamboa Street, Legaspi Village, Makati City, Philippines; that Yokohama Tire Philippines is engaged primarily in the purchase, importation, exportation, and sale of automobile, truck and aircraft tires and other related rubber articles, and other rubber goods and automotive and aircraft parts and accessories, based on its Amended Articles of Incorporation as duly approved by the SEC on May 13, 2008; that as of November 27, 2000, the capital stock of Yokohama Tire Philippines is PHP9,910,000.00, divided into 99,100 shares with a par value of PHP100.00 each; and that Yokohama Rubber Company owns 99,095 of these shares in Yokohama Tire Philippines. It is further represented that: ETIcHa 1. On December 23, 2008, the stockholders of Yokohama Tire Philippines unanimously adopted and approved, among others, a resolution declaring cash dividends of PHP29,730,000.00 for the stockholders on record of Yokohama Tire Philippines as of December 22, 2008, based on the notarized Certificate issued by the Corporate Secretary of Yokohama Tire Philippines , Mr. Carlos G. Platon, on March 4, 2009; 2. On January 26, 2009, the Board of Directors of Yokohama Tire Philippines unanimously adopted and approved a resolution declaring cash dividends of PHP270,000,000.00 for the stockholders on record of Yokohama Tire Philippines as of that date, based on another notarized Certificate issued by the same Corporate Secretary on March 4, 2009; and 3. As of December 22, 2008, Yokohama Rubber Company owns 99,095 of the 99,100 shares of stock of Yokohama Tire Philippines and 366,980 of the latter's 367,000 stock dividends, based on the notarized Certificate issued by the same Corporate Secretary on January 27, 2010; and 4. On March 31, 2009, Yokohama Tire Philippines paid cash dividends of PHP30,000,000.00 to its stockholders on record as of December 22, 2008, based on the same certificate dated January 27, 2010. It is finally represented based on the notarized Certification by the President of Yokohama Tire Philippines , Mr. Fumihiro Nishi, dated March 2, 2009, that the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling In reply, please be informed that a foreign corporation like Yokohama Rubber Company , whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is being invoked for this purpose is the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide as follows: "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. SHIcDT 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." 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 the rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are 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; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Yokohama Rubber Company owns 99.99 percent (99,095 of the 99,100) shares of stock of Yokohama Tire Philippines beginning November 27, 2000, up to present, such dividends paid by Yokohama Tire Philippines to Yokohama Rubber Company on March 31, 2009, are subject to income tax in the Philippines at the rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2, Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 7-10 dated May 20, 2010 and BIR Ruling No. ITAD 8-10 dated June 3, 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. SHaIDE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and effective January 1, 1981.