ITAD BIR Ruling No. 094-11

March 15, 2011 ITAD BIR RULING NO. 094-11 Article 10, Philippines-Japan tax treaty, as amended; Sections 28 (B) (1) and 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD-035-10; BIR Ruling No. ITAD 027-10 Nonato & Nonato Law Offices Room 406, Tulips Center A.S. Fortuna Street, Bakilid Mandaue City, Cebu Attention: Atty. Rester John L. Nonato Partner Gentlemen : This refers to your Tax Treaty Relief Application filed on November 2, 2010, on behalf of your client, Makoto Light Metal Co. Ltd. ("Makoto Light Metal") , requesting confirmation that the dividends to be paid to it by Philippine Makoto Corporation ("Philippine Makoto") are subject to income tax at the 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 ("Philippine-Japan tax treaty"), as amended by a Protocol 1 effective January 1, 2009. It is represented that Makoto Light Metal is a foreign corporation resident of Japan, based on the Certification of All Historical Data issued by the Shika Branch office of the District Legal Affairs Bureau in Saitama, Japan on September 28, 2010, and on the Certificate of Residence issued on June 24, 2010, by the Asaka Tax Office in Japan; that Makoto Light Metal is situated at 3-13-56 Kanimuneoka, Shiki City, Saitama, Japan; that Makoto Light Metal is not registered as a corporation or partnership in the Philippines based on the Certification of Non-registration of Corporation or Partnership issued by the Securities and Exchange Commission on March 25, 2008; and that, on the other hand, Philippine Makoto is a domestic corporation situated at 4th Street, 3rd Avenue, Mactan Ecozone I, Lapulapu City, Cebu, Philippines. It is further represented based on the Certificate issued by the Corporate Secretary of Philippine Makoto on October 22, 2010, that on October 18, 2010, the Board of Directors of Philippine Makoto declared cash dividends in the amount of Thirty Million Yen (JPY30,000,000.00) to all stockholders of record as of June 30, 2010, and payable on November 8, 2010; and that the subscribed and paid-up capital stock of Makoto Light Metal at the time of declaration of the dividends is 750,000 shares with a par value of P100 per share or a total par value of P75,000,000.00, which represent almost 100 percent ownership in the capital stock of Philippine Makoto. aASEcH It is finally represented that the aforesaid dividends are not subject of investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the same Corporate Secretary on October 22, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides that dividends paid to Makoto Light Metal, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 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 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 same Code provides that such dividends may be exempt or partially exempt (if subject to a reduced rate only) 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" Thus, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 to 4 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: ASHEca 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. 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. xxx xxx xxx." 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 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) 10 percent if the company paying the dividends is registered with the Board of Investments and engaged in preferred areas of investments under the investment incentive laws of the Philippines; and (c) 15 percent in all other cases. In view thereof and considering that Makoto Light Metal, during the period of six months immediately preceding the date of payment of the dividends on November 8, 2010, holds directly at least 10 percent (in fact, almost 100 percent) of the total shares of Makoto Light, this Office is of the opinion and so holds that the dividends to be paid by Philippine Makoto to Makoto Light in the amount of JPY30,000,000.00 are subject to income tax at the reduced rate of 10 percent pursuant to paragraph 2 (a), Article 10 of the Philippine-Japan tax treaty, as amended. ( BIR Ruling No. ITAD-035-10 dated September 14, 2010 and BIR Ruling No. ITAD 027-10 dated August 27, 2010) 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. acCTSE 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.