ITAD BIR Ruling No. 087-13

April 4, 2013 ITAD BIR RULING NO. 087-13 Article 10, Philippines-Japan tax treaty Mitsubishi Corporation-Manila Branch 14th Floor LV Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Naoki Motoi Gentlemen : This refers to your application for tax treaty relief filed on June 26, 2012, requesting confirmation that the dividend payments made by AYALA CORPORATION ("Ayala") to MITSUBISHI CORPORATION ("Mitsubishi") are subject to the preferential rate of 10 percent pursuant to 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 a Protocol 1 ("Philippines-Japan tax treaty") . TaDCEc It is represented that Mitsubishi is a foreign corporation organized and existing under the laws of Japan with its principal office address at 3-1 Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan based on its Residence Certificate issued by the Kojimachi Tax Office on February 3, 2012; that Mitsubishi is not registered as a corporation or as a partnership in the Philippines but was licensed to do business in the Philippines on March 20, 1967 based on the Certification issued by the Securities and Exchange Commission on January 17, 2012; and that on the other hand, Ayala is a domestic corporation situated at the 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that on May 29, 2012, Ayala declared cash dividends of PhP2.00 per share to all outstanding common shares of Ayala as of record date June 18, 2012 and payable on July 12, 2012; that as of July 29, 2011, Mitsubishi holds 63,077,540 common shares or 10.90% of the total issued and outstanding voting shares in Ayala based on the Certificate of the Corporate Secretary of Ayala issued on June 20, 2012; that the said dividends were paid to Mitsubishi on July 12, 2012 based on the Bank Certification issued by the Bank of Philippine Islands Stock Transfer Office on November 22, 2012. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Certification issued by Ayala on June 20, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, provides that dividends paid to Mitsubishi, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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%). cTADCH xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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. ACIDSc 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." (underscoring supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, beginning January 1, 2009, at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that Mitsubishi holds more than 10 percent of the total shares of Ayala during a period of six months immediately preceding the date of payment of the dividends, in fact it holds 10.90% shares in Ayala , and since the branch office of Mitsubishi is not effectively connected with the subject transaction based on the Affidavit issued by the treasurer of Mitsubishi Corporation-Manila Branch on June 20, 2012, this Office is of the opinion and so holds that such dividends paid by Ayala to Mitsubishi are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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. CcaDHT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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 effective January 1, 2009.