ITAD BIR Ruling No. 066-14

June 9, 2014 ITAD BIR RULING NO. 066-14 Article 10, Philippines-Japan tax treaty JGC Philippines, Inc. JGC Phils., Building 2109 Prime Street Madrigal Business Park Alabang, Muntinlupa City Attention: Mr. Shigeru Hanajima President Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on March 30, 2012, requesting confirmation that dividends paid by JGC Philippines, Inc. ("JGC Philippines") to JGC Corporation ("JGC") are subject to a reduced rate of income tax pursuant to 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 Philippines-Japan tax treaty, as amended 1 (Philippines-Japan tax treaty) . Facts It is represented that JGC is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan per Certification of Domicile issued by the District Director of Kojimachi Taxation Office on March 22, 2012 located at 2-1 Ohtemachi 2-chome, Chiyoda-ku, Tokyo, Japan; that JGC has a licensed to establish a regional operating headquarters in the Philippines in the name of JGC Corporation Manila Regional ROHQ; and that, on the other hand, JGC Philippines is a domestic corporation located at JGC Philippines Building, 2109 Prime Street, Madrigal Business Park, Ayala Alabang, Muntinlupa City, Philippines. It is further represented that as of December 31, 2011 JGC holds 339,993 shares of stock of JGC Philippines which account for 99.99 percent of the latter's capital since October 10, 2010; that JGC Philippines declared cash dividends as follows: TCcDaE Date of Declaration Amount Date of Payment March 16, 2012 Php774,118,234.00 May 31, 2012 It is also represented that the dividend was remitted to JGC Philippines on May 31, 2012 as evidenced by a notarized bank certificate issued by Mizuho Corporate Bank., Ltd.-Manila Branch on December 3, 2012; and that JGC-Manila , the Philippine branch of JGC, has no participation whatsoever, directly or indirectly, to the above dividend received by JGC, neither attributable to JGC-Manila nor paid or coursed through the latter since payments are directly remitted to JGC, per certification dated July 23, 2013 issued by the duly appointed President of JGC-Manila . HSaCcE It is finally represented, based on the Sworn Statement by the same Corporate Secretary on March 30, 2012, that the 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 of the taxpayer/s involved. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines 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 . . . 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: ScHADI "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, Article 10 of the Philippines-Japan tax treaty, as amended, 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: ITScAE 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. xxx xxx xxx" Based on the foregoing, 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 10 percent of the voting shares of the company paying the dividends 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. In all other cases, the 15 percent rate shall apply. In the instant case, while the JGC maintains a Philippine branch, it is represented that the said branch is not privy and does not have any participation whatsoever in the dividend income receive by JGC from JGC Philippines , any income derived by JGC independently of its Philippine Branch shall be considered income of JGC alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: cIECTH "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Accordingly, considering that JGC holds directly at least 10 percent of the total shares of stock of JGC Philippines during the period of six months immediately preceding the date of payment of the dividends (in fact, since October 10, 2010), such dividends paid by JGC Philippines to JGC are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. cACTaI 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 .