ITAD BIR Ruling No. 063-11

February 25, 2011 ITAD BIR RULING NO. 063-11 Article 10, Philippines-Japan tax treaty Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 087-83; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Aranas Consunji Barleta Law Offices Unit 106 G/F Le Metropolis Building 326 Tordesillas St. cor. De la Costa St. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated January 14, 2009 received by this Office on February 26, 2009, requesting confirmation of your opinion that the cash dividends to be received by Daito Corporation (Daito) from MD Distripark Manila, Inc. (MD) are subject to the 10 percent preferential tax rate pursuant to the Philippines-Japan tax treaty. IHTaCE It is represented that Daito is a Japanese corporation organized and existing under the laws of Japan with Company Serial No. 0104-01-016637, located at 2-1-13 Shibaura Minato-ku, Tokyo, Japan as evidenced by its Articles of Incorporation and Certificate of Registration of Company signed by Hitoshi Igarashi, Registrar of the Minato Branch of the Bureau of Tokyo Regional Legal Affairs, dated December 16, 2008; that Daito is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated January 23, 2009; that on the other hand, MD is a corporation duly organized and existing under the laws of the Philippines with principal office address at 121 East Science Avenue, Laguna Technopark, Bian, Laguna; and that it is engaged in warehousing, forwarding, wholesale distribution, and generally any and all acts connected with the business aforementioned or arising therefrom or incidental thereto. It is also represented that Daito directly owns Ninety-Three Thousand Five Hundred (93,500) shares, amounting to Ninety-Three Million Five Hundred Thousand Pesos (PhP93,500,000.00) representing 27.50% of the total shares issued by MD, per Certificate issued by Zenaida Chua, Corporate Secretary of MD dated February 23, 2009; that pursuant to the same Certification, Daito owns 27.50% of the total issued shares of MD during the period of six (6) months immediately preceding the date of actual payment of dividends on June 30, 2008; that on May 20, 2008, MD's Board of Directors declared cash dividends amounting to Forty Million Pesos (PhP40,000,000.00) to all stockholders of record as of May 31, 2008 in proportion to their respective stockholdings as of such date, payable on or before June 30, 2008; and that the issue/s or transaction subject of the above request for ruling is not under investigation, neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a 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. 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 . . ., dividends, . . .: 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 this particular case, the treaty involved is the Philippines-Japan tax treaty which, in its Article 10, 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. ScaCEH 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. 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" 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 months immediately preceding the date of payment of the dividends. Such being the case, and considering that Daito holds 27.50% of the outstanding shares of the voting stock of MD during the period of 6 months immediately preceding the date of payment of the cash dividends on June 30, 2008, this Office is of the opinion and so holds that the dividend payments by MD to Daito shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD-008-99 dated July 20, 1999; BIR Ruling No. ITAD-020-99 dated August 18, 1999; BIR Ruling No. ITAD-041-99 dated November 3, 1999; and BIR Ruling No. ITAD-047-99 dated December 9, 1999.) This ruling is issued based on 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