ITAD BIR Ruling No. 080-10

December 20, 2010 ITAD BIR RULING NO. 080-10 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-008-99; BIR Ruling No. DA-ITAD-020-99; BIR Ruling No. 087-83; BIR Ruling No. DA-ITAD-041-99; BIR Ruling No. DA-ITAD-047-99 Yutaka Manufacturing (Philippines), Inc. 110 North Science Avenue, Laguna Technopark Bian, Laguna Attention: Mr. Keiji Toyama President Atty. Ma. Fatima Ungson-Lui Head, Administration Division Gentlemen : This refers to your letter dated September 18, 2007, applying for relief from double taxation on the dividend payment of Yutaka Manufacturing (Philippines), Inc. ("Yutaka-Phil") to Yutaka Giken Co., Ltd. ("Yutaka-Japan") , pursuant to Article 10 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 ("Philippines-Japan tax treaty") . It is represented that Yutaka-Japan is a corporation organized and existing under the laws of Japan with principal address at 508-1, Toyo-machi, Higashi-ku, Hamamatsu City, Shizuoka Prefecture, Japan per Certification of Comprehensive Historical Background issued by the Registration Officer, Hamamatsu Branch, Shizuoka District Office of Bureau of Justice dated July 18, 2007; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 11, 2007; that Yutaka-Phil is an Export Processing Zone Authority (EPZA) (now Philippine Economic Zone Authority or PEZA)-registered corporation with Certificate of Registration No. 94-31 dated May 23, 1994, organized and existing under the laws of the Philippines, with principal address at 110 North Science Ave., Laguna Technopark, Bian, Laguna 4024. EHSADc It is further represented that Yutaka-Japan is a major stockholder of Yutaka-Phil with a shareholding of 99.997% or 529,995 shares with a par value of One Thousand Pesos (P1,000.00) per share acquired since February 6, 2003; that on July 19, 2007, the Board of Directors of Yutaka-Phil declared a cash dividend amounting to Twenty-Five Million Five Hundred Thousand Pesos (PhP25,500,000.00), out of Yutaka-Phil's retained earnings as of March 31, 2007, to all stockholders of records as of March 31, 2007 in proportion to their respective stockholdings as of such date payable on or before December 31, 2007; 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. 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 dividend income received by a nonresident foreign corporation which provides: "Section 28. Rates of Income Tax on Foreign Corporations . (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%)." CTAIHc However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. (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. " 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: ITSacC (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 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) 25 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." Based on the aforequoted provisions, 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 latter holds directly at least 25 percent of the voting shares 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. In view thereof and considering that Yutaka-Japan is a major stockholder of Yutaka-Phil with a shareholding of 99.99% during the period of 6 months immediately preceding the date of payment of dividends, said dividends paid by Yutaka-Phil to Yutaka-Japan are subject to 10 percent preferential tax rate, pursuant to the Philippines-Japan tax treaty. (ITAD Ruling No. 008-99 dated July 20, 1999; ITAD Ruling No. 020-99 dated August 18, 1999; BIR Ruling No. 087-83 dated May 17, 1983; ITAD Ruling No. 041-99 dated November 3, 1999; ITAD Ruling No. 047-99 dated December 9, 1999) STcEIC 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