ITAD BIR Ruling No. 067-13

March 13, 2013 ITAD BIR RULING NO. 067-13 Article 10, Philippines-Japan Tax Treaty, as amended Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Balikid, Mandaue Cebu City Attention: Atty. Rester John L. Nonato Legal counsel Gentleman: This refers to your tax treaty relief application filed on December 12, 2011 requesting confirmation that the cash dividends to be paid by TAP IMEX (P), INC. ("TIPI") to TAP CO. LTD. ("TCL") are subject to the preferential tax rate of 10 percent based on Article 10 (2) (a) of the Philippines-Japan tax treaty , as amended. 1 It is represented that TCL, with principal office address at 7-2-30 Yoshida, Higashiosaka City, Osaka, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certification by the Tax Authorities of the Country of Residence issued by the District Director of Higashiosaka Tax Office on November 11, 2011; that TCL is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration/Partnership issued by the Securities and Exchange Commission on September 16, 2011; that TIPI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at Mactan Economic Zone 2 Basak, Lapulapu City, Cebu; and that TIPI is registered with the Philippine Economic Zone Authority (PEZA) with Certificate of Registration No. 97-001F issued on January 21, 1997. It is also represented, per Secretary's Certificate dated November 9, 2011, that as of November 2, 2011, TCL owns 40,279 common shares in TIPI with total par value of Php4,027,900.00, representing 99.999% ownership of TIPI; and that these shares were acquired on January 10, 1997 by subscription on shares of stock by TCL. It is further represented that at the Special Meeting of the Board of Directors of TIPI on November 2, 2011, the Board approved and authorized the declaration of cash dividends for the fiscal year ended March 31, 2011 in the amount of Php1,500,000.00 in favor of all stockholders of record as of March 31, 2010; that the said dividends were paid to TCL on December 13, 2011 as evidenced by a Certification issued by the Bank of the Philippine Islands on August 16, 2012. HTDAac It is finally represented, based on the Sworn Statement by the same Corporate Secretary on November 9, 2011, 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. 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: "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 states that: "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: DSAEIT 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 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 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. Considering that since January 10, 1997, which is a period more than six (6) months immediately preceding the date of payment of the cash dividends, TCL owns 40,279 common shares, constituting 99.999% stock in TIPI, which is more than the 10 percent shareholding requirement of the total shares issued by that company, as shown in the certification issued by the Corporate Secretary of TIPI dated November 9, 2011, then the dividends paid to TCL by TIPI are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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. 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.