ITAD BIR Ruling No. 060-10

November 3, 2010 ITAD BIR RULING NO. 060-10 Article 10, Philippines-Japan Tax Treaty; BIR Ruling No. ITAD-009-09 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: J. A. Osana Tax Division Gentlemen : This refers to your letter dated June 30, 2009, on behalf of Sumitomo Electric Industries, Ltd. (hereinafter referred to as "SEI"), requesting confirmation that the cash dividends to be paid by First Sumiden Circuits, Inc. (hereinafter referred to as "FSCI") to SEI are subject to the preferential tax rate of 10 percent based on Article 10 (2) (a) of 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" ). It is represented that SEI is a nonresident foreign corporation organized and existing under the laws of Japan with principal office at 4-5-33 Kitahama, Chuo-ku, Osaka, 541-0041, Japan as shown in the Residence Certificate issued on January 13, 2009 by Mr. Masamune Iwasaki, District Director of Higashi Tax Office; that SEI was issued a license to establish a branch office in the Philippines on August 06, 1998 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on June 01, 2009; that pursuant to the said grant of license, SEI established a branch, Sumitomo Electric Industries, Ltd.-Philippine Branch (hereinafter referred to as "SEI-Phil" ); that, on the other hand, FSCI is a corporation duly organized and existing under the laws of the Philippines as a Philippine Economic Zone Authority (PEZA)- registered export enterprise with principal office at Ampere Street corner Main Avenue, Light Industry & Science Park, Special Export Processing Zone, Bo. Diezmo, Cabuyao, Laguna. It is further represented that FSCI has an authorized capital stock of 500 Million Pesos (Php500,000,000.00) divided into 5 Million common shares with a par value of Php100 per share; that 2,250,000 of the 5,000,000 common shares of FSCI have been subscribed and fully paid-up; that SEI is the registered and beneficial owner of 51% or 1,147,496 of the 2,250,000 total shares of stock issued by FSCI since November 11, 1999; that FSCI shares are recorded in the books of SEI in Japan and not in the books of its Philippine branch, SEI-Phil, since the said shares were acquired directly by SEI without the participation and intervention of said branch; that on March 05, 2008, the Board of Directors of FSCI passed and approved the declaration of cash dividends for the fiscal year ended December 31, 2007 in the aggregate amount of One Million Two Hundred Ninety-Six Thousand Five Hundred Fifty-Four US Dollars (US$1,296,554), payable on or before March 14, 2008, to all stockholders of record proportionate to their shareholdings; that based on the Secretary's Certificate dated March 11, 2008, SEI will receive US$661,243.00. aEcHCD Moreover, it is represented that although SEI-Phil exists as a branch of SEI in the Philippines, it has no participation whatsoever in the herein investment, and that such investment was made directly by SEI without using the funds of SEI-Phil; and that the income derived through the payment of dividends by FSCI to SEI is considered as income of SEI and not of SEI-Phil. It is finally represented that the transaction subject of the herein 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 taxpayers involved per Certification executed by the President of FSCI dated May 18, 2009. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides, viz.: "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, rents, royalties . . .: 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 relation thereto, the provisions of the Philippines-Japan tax treaty may apply to the instant case, Article 10 of which provides 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. 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. AIaDcH 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. xxx xxx xxx" Please be informed further that this Article 10 has been amended under Article III of a Protocol 1 amending the Philippines-Japan tax treaty which took effect on January 1, 2009, Article III of which reads as follows: "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 existing Philippines-Japan tax treaty, 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 during the period of six (6) months immediately preceding the date of payment of the dividends, and 25 percent in all other cases. Under the Amending Protocol, dividends arising in the Philippines beginning January 1, 2009, and paid to a resident of Japan, are subject to income tax in the Philippines at 10 percent of the gross amount of dividends if the Japanese corporation holds 10 percent either of the voting shares or of the total shares during the period of 6 months immediately preceding the date of payment of the dividends, and, 10 percent in all other cases. Considering that since 1999 and during the period of 6 months immediately preceding the date of payment of the cash dividend on March 14, 2008, SEI consistently owns at least 51% of the total shares issued by FSCI as shown in the Certification issued by the Assistant Corporate Secretary of FSCI dated June 23, 2009, then the dividends paid to SEI by FSCI are subject to tax at a preferential rate of 10 percent of the gross amount of dividends, pursuant to Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-009-09 dated April 1, 2009) 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. EDcIAC 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.