ITAD BIR Ruling No. 073-10

December 7, 2010 ITAD BIR RULING NO. 073-10 Article 10 (3), Philippines-Japan tax treaty; BIR Ruling No. 165-94; BIR Ruling No. 109-95; BIR Ruling No. 174-95; BIR Ruling No. ITAD-137-00; BIR Ruling No. ITAD-208-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated October 31, 2008, on behalf of your client, Mitsubishi Corporation-Tokyo Head Office (Mitsubishi-Japan), requesting confirmation of your opinion that the dividends to be paid and remitted by Manila Water Company, Inc. (Manila Water) to Mitsubishi-Japan are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (3) of the Philippines-Japan tax treaty. It is represented that Mitsubishi-Japan is a corporation organized and existing under the laws of Japan and is a resident of Japan based on the Residence Certificate issued by Mr. Norio Komatsu, District Director of Kojimachi Tax Office, with principal address at 3-1, Marunouchi 2-chome, Chiyoda-Ku, Tokyo, Japan; that it was licensed to engage in business in the Philippines on March 20, 1967 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated May 13, 2010; that, on the other hand, Manila Water is a Board of Investments (BOI)-registered corporation with Certificate of Registration No. 97-188 issued on August 20, 1997, registered as a pioneer enterprise as a new operator of water supply and sewerage system for the East Zone Service Area organized and existing under the laws of the Philippines with principal address at MWSS-Admin. Building, Katipunan Road, 1105 Balara, Quezon City; and that Mitsubishi-Japan made an investment in Manila Water for purposes peculiarly germane to the conduct of its own corporate affairs and not those of its branch in the Philippines. DCaEAS It is further represented that although Mitsubishi-Japan has a branch in the Philippines, the investment or shares in Manila Water was directly acquired by Mitsubishi-Japan, without the participation of its Philippine branch; that as of September 30, 2008, Mitsubishi-Japan is the registered owner of 168,999,999 common shares in the capital stock of Manila Water with a par value of One Hundred Sixty-Eight Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine Pesos (PhP168,999,999.00), representing 8.38% of the outstanding and voting shares of Manila Water; that during the board meeting of the Board of Directors of Manila Water on July 22, 2008, the Board of Directors of Manila Water passed and approved a Resolution declaring the following 2008 second semester cash dividends: P0.175 per share on the outstanding common shares; P0.0175 per share on the outstanding Participating Preferred shares, of the capital stock of Manila Water, payable to stockholders of record as of August 5, 2008, to be paid on September 2, 2008; that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per certification issued by Manila Water dated September 8, 2008. 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 income received by a nonresident foreign corporation which 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: aHTCIc "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" Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, 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 25 percent 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. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. 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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a resident of the Philippines registered with the BOI and engaged in preferred areas of investment under the investment incentives laws of the Philippines to a resident of Japan who is the beneficial owner of the dividends at a rate not exceeding 10 percent of the gross amount of the dividends. TEAaDC Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents. (G.R. No. 76573 dated September 14, 1989), it was held that: "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." Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by Manila Water to Mitsubishi-Japan shall be considered as income of Mitsubishi-Japan as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). In view thereof and considering that Manila Water is a resident company of the Philippines registered with the BOI and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and considering further that Mitsubishi-Japan directly invested with Manila Water without the participation of its Philippine Branch, the dividend payment of Manila Water to Mitsubishi-Japan shall be subject to the preferential tax treaty rate of 10 percent, pursuant to the Article 10 (3) of the Philippines-Japan tax treaty. (BIR No. 165-94 dated December 5, 1994; BIR Ruling No. 109-95 dated July 21, 1995; BIR Ruling No. 174-95 dated October 25, 1995; BIR Ruling No. ITAD-137-00 dated September 19, 2000; BIR Ruling No. ITAD-208-02 dated November 26, 2002) HATEDC 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