ITAD BIR Ruling No. 059-10

November 3, 2010 ITAD BIR RULING NO. 059-10 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Attention: Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your letter dated December 17, 2009, on behalf of HITACHI METALS TOOL STEEL LTD., (hereinafter referred to as "HMTSL") requesting confirmation of your opinion that dividend payments by PHILIPPINE PRECISION TECHNOLOGY, INC. (hereinafter referred to as "PPTI") to its parent company, HMTSL, are subject to the 10 percent preferential final withholding tax under 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") and the Protocol amending the Philippines-Japan tax treaty. It is represented that HMTSL, with principal address at Across Shinkawa Bldg. 8-8 1-chome Shinkawa, Chuo-ku, Tokyo 104-0033 Japan, is a corporation organized and existing under the laws of Japan per the duly authenticated certified Articles of Incorporation for HMTSL dated December 4, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated December 10, 2009; that, PPTI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal address at 108 Accuracy Drive, SEPZ, Carmelray Industrial Park, Canlubang, Calamba City, Laguna, Philippines; that per Secretary's Certificate issued by PPTI dated December 4, 2009, as of November 27, 2009, PPTI has an authorized capital stock of Php40,000,000.00 at Php1,000.00 par value per share, with Php20,000,000.00 issued and outstanding capital; and that the percentage of shareholding of HMTSL in PPTI is 99.975% which shares were held by HMTSL since April 5, 2005. It is further represented that during a Special Meeting of the Board of Directors of PPTI on November 27, 2009, a resolution was unanimously approved and adopted declaring a cash dividend of Php22,000,000.00 out of the Php88,846,309.00 unrestricted retained earnings of PPTI, payable at Php1,100.00 per share to the stockholders of record as of December 11, 2009, distributable on or before January 15, 2010, per Secretary's Certificate issued by PPTI dated December 3, 2009. DTEcSa It is finally represented that per the duly Sworn Certification of the Corporate Secretary of PPTI on December 4, 2009, the issue or transaction subject of the request for ruling 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 Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "SEC. 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%)." However, Section 32 (B) (5) of the NIRC of 1997 provides, viz.: "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 ( i.e. , TITLE II TAX ON INCOME): 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." In this particular case, the treaty invoked 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. HCETDS (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 company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. In relation thereto, there is the Protocol amending the Philippines-Japan tax treaty (Protocol) which took effect on January 1, 2009 which Article III provides, viz.: "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. 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." 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 on dividends in all other cases was reduced to 15 percent. In view thereof, considering that HMTSL holds 99.975% shares in PPTI since April 5, 2005 or more than 6 months immediately preceding the date of payment of the dividends on January 15, 2010, which is more than the 10 percent minimum required shareholdings to avail of the 10 percent rate, said dividends to be paid by PPTI to HMTSL are subject to 10 percent preferential tax rate of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (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; BIR Ruling No. ITAD-35-10 dated September 14, 2010) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. CAScIH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue