ITAD BIR Ruling No. 059-11

February 22, 2011 ITAD BIR RULING NO. 059-11 Article 10 (2) (b), Philippines-Japan tax treaty, as amended Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: M.F.A. Balili Tax Division Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on June 7, 2010, on behalf of your client, Sumitomo Osaka Cement Co., Ltd. ("Sumitomo") , requesting confirmation that the dividend payments to it by Holcim Philippines, Inc. ("Holcim") are subject to withholding tax rate of 15 percent pursuant to Article 10 (2) (b) of the amended 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 (hereafter referred to as the "Philippines-Japan tax treaty, as amended" ). 1 DHcTaE It is represented that Sumitomo is a corporation organized and existing under the laws of Japan with principal address at 6-28, Rokubancho, Chiyoda-ku, Tokyo, 102-8465, Japan, based on a Certificate of Residence issued by Yoshinobu Ono, District Director of Kojimachi Tax Office on June 4, 2010; that Sumitomo is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 16, 2010; and that, on the other hand, Holcim is a corporation organized and existing under the laws of the Philippines with principal address at 7th Floor, Two World Square, McKinley Hill, Fort Bonifacio. It is further represented that on May 4, 2010, the Board of Directors of Holcim approved a resolution to declare cash dividends in the amount of Php0.40 per share, in favor of the stockholders of record of Holcim as of June 3, 2010, and payable not later than June 25, 2010; that as of May 4, 2010, Sumitomo holds 594,952,725 common shares in Holcim, or a total amount of Php594,952,725, representing 9.22 percent of the total and outstanding shares of Holcim. It is finally represented that the issue or transaction subject of the 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 judicial appeal, per Certification issued by Holcim on June 1, 2010. 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 dividends received by a nonresident foreign corporation, 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 interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): 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. 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." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, 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; aDcTHE 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." 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 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. In the instant case, considering that Sumitomo, holds less than 10 percent of the total outstanding capital stock of Holcim this Office is of the opinion and so holds that the cash dividends paid by Holcim to Sumitomo shall be subject to the preferential tax rate of 15 percent, based on the gross amount thereof, pursuant to Article 10 (2) (b) of the 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. Signed on December 9, 2006, and effective January 1, 2009.