ITAD BIR Ruling No. 087-14

June 19, 2014 ITAD BIR RULING NO. 087-14 Article 10 (Dividends), Philippines-Japan tax treaty Toyota Motors Philippines Corp. Toyota Special Economic Zone Santa Rosa-Tagaytay Highway Santa Rosa City, Laguna Attention: Ms. Blesilda M. Rodriguez First Vice President-Comptrollership Gentlemen : This refers to your tax treaty application ("TTRA") filed on May 6, 2013, requesting confirmation that dividends paid by Toyota Motor Philippines Corporation ("TMP") to Toyota Motor Corporation ("TMC") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Japan with respect to Taxes on Income, as amended. TMC is a foreign corporation organized and existing under the laws of Japan. It is a resident of Japan since its merger in 1982 within the meaning of the Convention to avoid double taxation between the Philippines and Japan per certificate of residence issued by the Ministry of Finance of Japan on April 2, 2013. It was licensed to establish its representative office in the Philippines on June 1, 1984 but later on filed its certificate of cancellation of license of a foreign corporation on January 16, 1989 which was approved on July 9, 1990. On the other hand, TMP is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at Toyota Special Economic Zone, Santa Rosa-Tagaytay Highway, Santa Rosa City, Laguna. It is represented that TMC is the registered owner of Five Million Two Hundred Sixty-Seven Thousand Nine Hundred Ninety-Six (5,267,996) common shares and 4 nominee shares as of December 31, 2012 constituting Thirty-Four Percent (34%) of TMP's issued and outstanding shares; and that these shares were acquired on the following dates: aCTHEA 550,000 shares August 3, 1988 412,500 shares December 26, 1990 37,500 shares April 23, 1992 2,292,500 shares October 15, 1993 790,200 shares September 21, 1999 1,185,300 shares October 15, 1999 It is also represented that on April 11, 2013, TMP, through its Board of Directors, declared cash dividends in the amount of Two Billion Nine Hundred Ninety Four Million One Hundred Eleven Thousand Forty Two Pesos and 00/100 (P2,994,111,042.00) which is equivalent to 193.24% of the outstanding capital stock of TMP payable to all stockholders of record as of December 31, 2012; and that, per notarized certification issued by Metrobank dated May 30, 2013, Two Billion One Hundred Eighty Five Million Six Hundred Thirty Three Thousand Six Hundred Forty Nine and 00/100 Japanese Yen (JPY2,185,633,649) were debited from TMP's account and remitted to the account of TMC in the Bank of Tokyo-Mitsubishi UFJ, Tokyo, Japan on May 20, 2013. aCTcDS It is further represented, per sworn certification issued on April 18, 2013 by the First Vice President of the Comptrollership Division of TMP that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to TMC are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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 interests, 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." CScaDH However, under Section 32 (B) (5) of the Tax Code, these 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: "SEC. 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." For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 1, 2, & 3 of 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. IcaHTA 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." Under paragraphs 2 and 3 of Article 10, 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 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 during the 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 investment incentives laws of the Philippines; and (c) 15 percent in all other cases. SIEHcA Accordingly, the dividend paid by TMP to TMC is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) TMC holds 5,267,996 common shares constituting thirty four percent (34%) of the total shares of TMP, which is more than ten percent (10%) of the capital of the said company ; and (2) TMC holds the said shares during the period of 6 months immediately preceding the date of payment of the dividends on May 20, 2013 or since October 15, 1999. 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