ITAD BIR Ruling No. 083-13

April 4, 2013 ITAD BIR RULING NO. 083-13 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Lina P. Figueroa Partner Gentlemen : This refers your Tax Treaty Relief Application ("TTRA") filed on December 27, 2011, on behalf of Suminac Philippines, Inc. ("Suminac") , requesting confirmation that the dividend payments of Suminac to Sumitomo Nacco Materials Handling Co. Ltd. ("Sumitomo") are subject to 10 percent preferential tax rate, pursuant to Article 10 of the amended 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") . acIHDA It is represented that Sumitomo , with principal address at 2-75 Daito-cho Obu-shi, Aichi, 474-8555, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof per the Certificate of Status of Taxable Person issued on November 14, 2011 by the District Director of Handa Tax Office; that it is not registered either as a corporation or partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated December 2, 2011; and that, on the other hand, Suminac is a corporation organized and existing under the laws of the Philippines with principal address at First Cavite Industrial Estate (FCIE), Phase 3, Block 2, Lot 5 & 6, Barangay Langkaan, Dasmarias, Cavite. It is further represented that at the special meeting of the Board of Directors of Suminac held on November 23, 2011, a resolution was passed and approved declaring cash dividends amounting to Four Hundred Thirty Thousand Dollars ($430,000.00) for the first half of year 2011 in favor of Sumitomo , which is payable on January 31, 2012; that based on the Secretary's Certificate issued by Suminac dated December 5, 2011, through various subscriptions beginning January 9, 1996 and, as of the record date, Sumitomo is the legal and beneficial owner of 712,495 common shares (with complete voting rights) in Suminac , which represents 99.99% of the latter's total outstanding capital stock. It is further represented, based on the Sworn Statement issued on October 11, 2012 by the Accounting Manager of Suminac , that the dividends for Sumitomo was used by the latter to offset its payables to Suminac ; that on January 2012 the said offsetting was effected as evidenced by its Netting Schedule; that as a result of the offsetting, the remaining receivable of Suminac from Sumitomo was reduced to USD507,203.70; and that said balance was remitted by Sumitomo to Suminac 's Rizal Commercial Banking Corporation Dollar Savings Account on February 1, 2012, per the Certification of RCBC issued on November 29, 2012. It is finally represented, per the Certification issued by Suminac dated November 23, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, 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: cDHAES "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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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 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. STHDAc 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 percent 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. 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, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Sumitomo directly holds 99.99% percentage ownership of the voting shares and paid up capital stock in Suminac , and that Sumitomo has maintained these shareholdings more than six months immediately preceding the date of payment of the dividends, such dividends to be paid by Suminac to Sumitomo are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. ( BIR Ruling No. ITAD-32-11 dated January 28, 2011 ) IEaHSD 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