ITAD BIR Ruling No. 083-16

April 6, 2016 ITAD BIR RULING NO. 083-16 Article 10, Philippines-Japan Tax Treaty Mitsubishi Corporation Manila Branch 13th & 14th Floor, L.V. Locsin Building 6752 Ayala Avenue corner Makati Avenue 1226 Makati City Attention: Mr. Kiyoshi Takagi Treasurer Gentlemen : This refers to your tax treaty relief application filed on January 30, 2013, on behalf of Mitsubishi Logistics Corporation ("MLC") , requesting confirmation that dividends paid to MLC by Ayala Corporation ("Ayala") are subject to the 15 percent preferential tax rate pursuant to Article (10) (2) (b) 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 as amended by Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that MLC is a corporation organized and existing under the laws of Japan, and is a resident of Japan per Residence Certificate issued by the District Director of Kyobashi Tax Office on January 16, 2013; that MLC is not registered either as a corporation or as a partnership in the Philippines as shown in the Certificate of Corporate of Non-Registration of issued by the Securities and Exchange Commission on January 28, 2013; and that Ayala , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines. It is further represented that on December 14, 2014, the Board of Directors of Ayala approved a resolution declaring cash dividends of Php2.00 per share, to be distributed to the common shareholders of Ayala as of January 8, 2013; that MLC holds 360,512 common shares representing 0.0607% of the total issued and outstanding common shares in Ayala ; that MLC acquired said shares in Ayala on various dates from the original issuance on November 30, 2005 to July 29, 2011, as stock dividend; and that the said dividends were paid to MLC on February 1, 2013. Finally, it is represented that the transaction subject of the herein request for ruling 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), 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, rents, royalties . . . : 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, 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 relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: AIDSTE "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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. . . ." Based on the foregoing, 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 of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. Considering that MLC is a resident of Japan with no fixed place of business in the Philippines, and which owns 360,512 common shares representing 0.0607% of Ayala's total shares, which is less than 10 percent of its voting shares, this Office is of the opinion and so holds that the dividends paid by Ayala to MLC are subject to the higher preferential tax rate of 15 percent of the gross amount of the dividends, pursuant to Article 10 (2) (b) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol amending treaty took effect on January 1, 2009.