ITAD BIR Ruling No. 080-11

March 11, 2011 ITAD BIR RULING NO. 080-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10; BIR Ruling No. ITAD 008-10 Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St., Salcedo Village, Makati City Attention: Atty. J. Gregson A. Castillo Atty. Ma. Pilar M. Pilares-Gutierrez Authorized Representatives Gentlemen : This refers to your letter dated May 31, 2010, on behalf of your client, SAN TECHNOLOGY, INCORPORATED ("STI"), requesting confirmation of your opinion that the dividend payments made by STI to HITACHI METALS, LTD. ("HML") are subject to the preferential 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 ("Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. HTDCAS It is represented that HML is a nonresident foreign corporation, organized and existing under the laws of Japan, with principal address at Seavans North Building, Shibaura 1-2-1, Minato-ku, Tokyo 105-8614, Japan; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 27, 2010; and that, on the other hand, STI is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at Main Avenue cor. 3rd Street, Cavite Economic Zone, 4106 Rosario, Cavite City. It is also represented that STI has an authorized capital stock of One Billion Three Hundred Twenty Million Pesos (P1,320,000,000), divided into Thirteen Million Two Hundred Thousand (13,200,000) shares, with a par value of One Hundred Pesos (P100), and out of the said authorized capital stock, 12,900,519 shares are issued and outstanding; that HML, together with its nominee-directors, as certified by STI's Assistant Corporate Secretary, in the Secretary's Certificate dated August 31, 2010, wholly owns STI's issued and outstanding shares as of December 31, 2009, and for a period of six months prior to the date of payment of the dividends on June 30, 2010; that on May 24, 2010, the Board of Directors of STI declared cash dividends amounting to Two Million One Hundred Three Thousand Dollars (USD2,103,000), out of the unrestricted retained earnings of STI as of March 31, 2010, in favor of HML per Secretary's Certificate dated June 9, 2010; and that the transaction subject of the above request for ruling is not under investigation, or subject of an on-going audit, administrative protest, claim 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 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, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). 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" In this particular case, the treaty involved is the Philippines-Japan tax treaty, as amended, which, in its Article 10, provides as follows: HcDaAI "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. 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 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 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, or if the dividends are paid to by a company who is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment. Such being the case, and considering that HML held nearly 100% percent of the total shares of stock of STI (exclusive of shares held in trust by HML's nominee directors) during the period of 6 months immediately preceding the dates of declaration and payment of dividends, this Office is of the opinion and so holds that the dividend payments by STI to HML shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. 007-10 dated May 20, 2010; BIR Ruling No. ITAD-008-10 dated June 3, 2010) 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. TcIAHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue