ITAD BIR Ruling No. 062-11

February 25, 2011 ITAD BIR RULING NO. 062-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-007-10 Pilipinas Total Gas, Inc. Grd. Floor Sec. D, MDD East Science Ave. Laguna Technopark, Bian, Laguna Attention: Yoshihiro Watanabe President Gentlemen : This refers to your letter dated December 17, 2009, requesting confirmation of your opinion that the dividends to be paid by Pilipinas Total Gas, Inc. ("PTGI") to Tomoe Shokai Co., Ltd. ("TSCL") and Taiyo Nippon Sanso Corporation ("TNSC") are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) 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 ("Philippines-Japan tax treaty") . 1 HCEISc It is represented that TSCL is a corporation organized and existing under the laws of Japan with principal address at 1-1-25 Minami Kamata, Ohta-ku, Tokyo, Japan as per its Certificate of Articles of Incorporation; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 4, 2009; that TNSC is a corporation organized and existing under the laws of Japan with principal address at 1-3-26, Koyama, Shinagawa-ku, Tokyo, Japan; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 4, 2009; and that, on the other hand, PTGI is a corporation organized and existing under the laws of the Philippines with principal address at MDD 121 East Avenue, Laguna Technopark, Bian, Laguna. It is further represented that TSCL and TNSC respectively hold 374,997 and 362,500 shares respectively representing 49.99% and 48.33% of the stockholdings of PTGI, and which were acquired more than six (6) months prior to PTGI's payment of the dividends per Secretary's Certificate issued by PTGI dated June 11, 2010; that on November 17, 2009, the Board of Directors of PTGI resolved to declare cash dividends equivalent to Php12.00 per share or a total of Php9,000,000.00 to stockholders of record as of December 2, 2009, and payable on December 21, 2009; and that per Affidavit issued by PTGI dated December 18, 2009, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. 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. (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%)." aSDCIE However, Section 32 (B) (5) of the Tax Code of 1997, as amended, reads: "Section 32. Gross Income. (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." 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; 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." HaSEcA Based on the aforequoted provisions, the Philippines may tax the dividends paid by 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 of 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 view thereof and considering that TSCL and TNSC respectively hold directly 49.99% and 48.33% of the shareholdings in PTGI or more than the required minimum shareholdings of 10 percent, for a period of 6 months immediately preceding the date of payment of dividends, said dividends paid by PTGI to TSCL and TNSC are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010) 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 February 13, 1980, and effective January 1, 1980.