ITAD BIR Ruling No. 082-10

December 20, 2010 ITAD BIR RULING NO. 082-10 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Asia Pacific Business Legal Consulting 2nd Floor Bldg. B. Mactan Marina Mall Mactan Economic Zone I Ibo, Lapulapu City 6015 Cebu, Philippines Attention: Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on July 02, 2010 on behalf of your client TSUNEISHI HOLDINGS (CEBU), INC. ("THD-Cebu"), requesting confirmation that the cash dividend payments made by THD-Cebu to TSUNEISHI HOLDINGS CORPORATION ("THD-Japan") are subject to the preferential rate of 10 percent Philippine withholding tax under 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 ("Philippines-Japan tax treaty") . It is represented that THD-Japan (formerly, Tsuneishi Corporation), with main office at 1083 Tsuneishi, Numakuma-cho, Fukuyama-city, Hiroshima, Japan, is a foreign corporation duly organized and established under the laws of Japan on April 30, 1942, and is a resident of and subject to taxation in Japan with Tax Reference No. 340090, per certification by the District Director of Fukuyama Tax Office dated May 31, 2010; that THD-Japan 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 Philippine Securities and Exchange Commission dated June 4, 2010; that THD-Cebu, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with address located at West Cebu Industrial Park-Special Economic Zone, Buanoy, Balamban, Cebu 6041. SAaTHc It is further represented that per Board Resolution No. 03 Series of 2010, THD-Cebu has an accumulated and unrestricted retained earnings in the amount of One Billion Two Hundred Fifty-Three Million One Hundred Ten Thousand Six Hundred Sixty-Two Pesos and 12/100 (Php1,253,110,662.12) and that on June 22, 2010, the Board of Directors of THD-Cebu passed and approved the declaration of cash dividends in the amount of One Billion One Hundred Thirty-Seven Million Pesos (Php1,137,000,000.00); that per Secretary's Certificate dated June 23, 2010, the cash dividends will be paid on June 28, 2010 to stockholders of record as of June 1, 2010; that on December 28, 2009, that is, six (6) months prior to the date of dividend payment, THD-Japan directly held 804,349,995 shares representing 99.99% interest and ownership in THD-Cebu; that on March 31, 2010, when THD-Cebu increased its capital stock issuance to 813,046,877 shares, THD-Japan directly held 813,046,872 shares representing 99.99% interest and ownership in THD-Cebu; and that the 813,046,872 shares held directly by THD-Japan in THD-Cebu has a par value per share of Php1.00 or a total par value of Php813,046,872.00. It is finally represented that the transaction subject of the herein TTRA 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 affidavit executed by THD-Cebu on June 25, 2010. In reply, please be informed that income derived in the Philippines by a nonresident foreign corporation, as in the instant case THD-Japan, is generally governed by Section 28, paragraph B, sub-paragraph 1 of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides, viz.: "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%). THAECc xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, the said income may be exempt or, partially exempt from Philippine income tax. It provides, viz.: "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 accordance with the foregoing, you now invoke Article 10 (2) (a) of the Philippines-Japan tax treaty, 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 which took effect on January 1, 2009. Article III of the said Protocol reads as follows: DaHISE "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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." Pursuant to the above Protocol, the minimum shareholding requirement for the application of the 10 percent preferential tax rate on dividends was reduced from 25 percent to 10 percent; and the maximum preferential tax rate of 25 percent on dividends in all other cases was reduced to 15 percent. In view thereof and considering that THD-Japan holds 99.99% interest and ownership in THD-Cebu during the period of 6 months prior to the date of payment of the dividends on June 28, 2010, this Office is of the opinion and so holds that the subject dividends which were paid by THD-Cebu to THD-Japan are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-07-10 dated May 20, 2010; BIR Ruling No. ITAD-08-10 dated June 03, 2010; BIR Ruling No. ITAD-11-10 dated June 16, 2010; BIR Ruling No. ITAD-35-10 dated September 14, 2010) cADaIH 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