ITAD BIR Ruling No. 059-13

March 13, 2013 ITAD BIR RULING NO. 059-13 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-096-11 FHP Corporation 120 North Science Avenue LTI Bian, Laguna Attention: Mr. Benito N. de Leon President Gentlemen : This refers to your application for tax treaty relief filed on January 30, 2012 requesting confirmation that dividend payments to Futaba Corporation ( "Futaba-Japan" ) by FHP Corporation ( "FHP-Phil" ) are subject to 10 percent preferential income tax rate pursuant to Article 10 of the Convention Between the Republic of the Philippines and Japan, as amended, 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 effective January 1, 2009. It is represented that Futaba Corporation is a foreign corporation organized and existing under the laws of Japan and a resident thereof with principal office address at 629 Oshiba Mobara-shi, Chiba-ken, Japan based on the Certification issued by the District Director of Mobara Tax Office of Japan dated October 26, 2011; that Futaba Corporation is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on January 16, 2012; and that on the other hand, FHP-Phil is a domestic corporation situated at 120 North Science Avenue, LTI Bian, Laguna. It is further represented that during the Special Meeting of the Board of Directors of FHP-Phil held on October 18, 2011, FHP-Phil declared cash dividends in the amount of PhP8,750,000.00 or PhP100 per share in favor of its shareholders of record as of October 30, 2011 payable on or before March 31, 2012 based on the Certificate issued by the Corporate Secretary of FHP-Phil on January 12, 2012; that the said dividends were paid on March 22, 2012 based on the telegraphic transfer validated by Rizal Commercial Bank Corporation on even date; that Futaba Corporation owns 35,000 class A common shares of stock, inclusive of two nominee shares, with par value of PhP35,000,000 constituting 40% in FHP-Phil as of date of declaration and date of payment of the dividends; that the said shares of stock owned by Futaba Corporation in FHP-Phil were acquired on various dates from 1995 to 2009 based on the Certificate issued by the corporate secretary of FHP-Phil on April 30, 2012. TIaCcD It is finally represented that the dividends subject of this ruling 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 Sworn Statement issued by the President of FHP-Phil on January 24, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ),as amended, provides that dividends paid to Futaba Corporation, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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%). aDHCAE xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, you invoke the Philippines-Japan tax treaty, as amended by the Protocol. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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: THIECD 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. DCESaI xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that Futaba Corporation holds more than 10 percent (in fact it holds 40 percent) of the total shares of FHP-Phil during a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that such dividends paid by FHP-Phil to Futaba Corporation are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD-096-11 dated March 15, 2011) . 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. 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.