ITAD BIR Ruling No. 076-14

June 10, 2014 ITAD BIR RULING NO. 076-14 Article 10, Philippines-Japan Tax Treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Fabian K. delos Santos Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on February 1, 2013, on behalf of Taiheiyo Cement Corporation ("TCC") , requesting confirmation that the dividend payment made by Taiheiyo Cement Philippines, Inc. ("TCPI") to TCC is subject to the 10 percent preferential tax rate 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 , as amended by the 2009 Protocol ("Philippines-Japan tax treaty, as amended") . CTSHDI It is represented that TCC, with address at 2-3-5, Daiba, Minato-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate issued by the District Director of Shiba Tax Office on January 27, 2012; that TCC is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated January 29, 2013; and that TCPI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 11th Floor, Insular Life Bldg., Cebu Business Park, Cebu City. It is also represented, per Secretary's Certificate dated January 22, 2013, that as of December 26, 2012, TCC owns 5,803,189 common shares and 7,000,000 redeemable preferred shares, including the five (5) common shares held by its nominee stockholders, with a total par value of Php1,280,318,900.00, representing 100% of the total subscribed and paid-up stock of TCPI; and that these shares were acquired by TCC on various dates starting March 26, 2011 through subscription; that at their special meeting on December 26, 2012, the Board of Directors of TCPI approved the declaration of cash dividend for a total amount of Two Hundred Fifty Million Pesos (Php250,000,000.00) to stockholders of record as of December 31, 2012; that the said dividend was paid to TCC on March 18, 2012 as evidenced by a Certification of Outward Remittance issued by Mizuho Corporate Bank, Ltd. Manila Branch dated April 3, 2013. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by TCPI dated January 22, 2013. 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%). ITADaE 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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked 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. 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. AIHTEa 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. This being the case, inasmuch as TCC holds directly 100% of the outstanding capital stock of TCPI (which in fact exceeds the minimum required percentage of holding of 10 percent), and since TCC maintains such holdings since March 26, 2011, and, in effect, more than six months immediately preceding the date of payment of the dividends, such dividends paid by TCPI to TCC is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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