ITAD BIR Ruling No. 078-13

April 3, 2013 ITAD BIR RULING NO. 078-13 Articles 10 (Dividends), Philippines-Japan tax treaty Mitsubishi Corporation Manila Branch 14th Floor, L.V. Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Mr. Naoki Motoi Treasurer Gentlemen : This refers to your application for tax treaty relief filed on May 8, 2012, requesting confirmation that dividends to be paid by Manila Water Company, Inc. ("Manila Water") to Mitsubishi Corporation Tokyo Head Office ("Mitsubishi-Japan") are subject to the preferential rate of 10 percent 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 a Protocol 1 ("Philippines-Japan tax treaty") . IHcSCA It is represented that Mitsubishi-Japan is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certification issued by the tax authority in Japan, on January 24, 2012; that Mitsubishi-Japan was issued a license to do business in the Philippines on March 20, 1967 based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on January 17, 2012; and that on the other hand, Manila Water is a domestic corporation situated at MWSS Administration Building, Katipunan Road, 1105 Balara; that Manila Water is a domestic company listed in the Philippine Stock Exchange and registered with the Board of Investments ("BOI") under Certificate of Registration No. 97-188 issued on August 20, 1997. It is further represented that at a regular meeting of the Board of Directors of Manila Water held on April 16, 2012, at which meeting a quorum duly existed, the Board approved that the following cash dividends for the first semester of 2012: a) P0.298 per share on the outstanding common shares; b) P0.0298 per share on the outstanding participating preferred shares. payable on May 24, 2012 to stockholders of record of the company as of April 30, 2012, based on the Certificate issued by the Corporate Secretary of Manila Water on May 8, 2012; that Mitsubishi-Japan is the owner of 169,000,000 common shares of stock in Manila Water since 1997 with a total par value of PhP4,174,299,975.30, representing 8.29% of the shares of Manila Water ; that on May 24, 2012, said dividends were paid by Manila Water to Mitsubishi-Japan based on the Certification issued by Ernesto L. Mundo dated October 29, 2012; and that on the other hand, Mitsubishi Corporation-Manila Branch has no investments in Manila Water and that the branch is not a material factor in the realization of gain received by Mitsubishi-Japan based on the Affidavit executed by the Treasurer of Mitsubishi Corporation-Manila Branch on April 24, 2012. It is finally represented that the payments subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Affidavit issued by the Chief Finance Officer of Manila Water on May 8, 2012. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, provides as follows: "SEC. 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 interests, 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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." EcASIC In this particular case, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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. 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. xxx xxx xxx" (underscoring supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, beginning January 1, 2009, at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that the dividends were paid to a resident of Japan, by Manila Water , a domestic corporation registered with the BOI and engaged in preferred areas of investment under the investment incentives laws of the Philippines, this Office is of the opinion and so holds that such dividends paid by Manila Water to Mitsubishi Japan are subject to income tax at a preferential rate of 10 * percent based on the gross amount thereof, since Mitsubishi Japan only holds 8.29 percent shares of Manila Water , pursuant to paragraph 3, 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. EIcTAD 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 effective January 1, 2009.