ITAD BIR Ruling No. 076-11

March 10, 2011 ITAD BIR RULING NO. 076-11 Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valer Partner Gentlemen : This refers to your Tax Treaty Relief Application filed on November 26, 2009 and supplementary letter dated June 1, 2010, on behalf of your client, Imasen Philippine Manufacturing Corporation ("Imasen") , requesting confirmation of your opinion that the dividend payments of Imasen to Mitsubishi Corporation ("Mitsubishi-Japan") are subject to withholding tax rate of 10 percent pursuant to Article 10 (2) (a) of 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, as amended by the 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 (hereafter referred to as the "Philippines-Japan tax treaty, as amended" ). 1 acITSD It is represented that Mitsubishi-Japan is a corporation organized and existing under the laws of Japan with principal address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan, based on a Certificate of All Matters at Present issued by Tokyo Legal Affairs Bureau dated October 27, 2009; that it was licensed to engage in business in the Philippines on March 20, 1967, and to date, no petition for the withdrawal or cancellation of said license have been filed by it per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated May 4, 2010; that on the other hand, Imasen is a corporation organized and existing under the laws of the Philippines with principal address at 101 East Main Avenue, Laguna Technopark, Bian, Laguna. It is further represented that, as evidenced by Certifications dated June 4, 2010 and October 6, 2010 issued by the Corporate Secretary of Imasen, Mitsubishi-Japan has Sixteen Thousand Two Hundred Forty-Nine (16,249) subscribed and paid up shares of Imasen, while Mr. Toshifumi Inami, its nominee, owns 1 share; that, together, it represents 10% of the total subscribed and paid up capital stock of Imasen; that at the special meeting of the Board of Directors of Imasen on March 16, 2009, it was resolved that cash dividend in the amount of Seventy-One Million Five Hundred Thousand Yen (71,500,000.00), or Four Hundred Forty Yen (440) per share be declared to Imasen's stockholders of record as of year 2008, payable on or before March 30, 2009; and 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 Imasen dated November 11, 2009. 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. 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 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%)." 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. DaHSIT xxx xxx xxx" 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. xxx xxx xxx." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a 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 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 the instant case, considering that Mitsubishi-Japan, excluding the shares of its nominee, holds less than 10 percent of the total outstanding capital stock of Imasen, this Office is of the opinion and so holds that the cash dividends paid by Imasen, to Mitsubishi-Japan shall be subject to the preferential tax rate of 15 percent, based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. 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 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 Imasen 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). 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. prLL Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on December 9, 2006, and effective January 1, 2009.