ITAD BIR Ruling No. 094-15

March 25, 2015 ITAD BIR RULING NO. 094-15 Article 10, Philippines-Japan tax treaty Imasen Philippines Manufacturing Corporation 101 East Main Avenue Laguna Technopark Bian, Laguna Attention: Mr. Koichi Fukui President Gentlemen : This refers to your tax treaty relief application filed on April 13, 2012, requesting confirmation that dividends received by Imasen Electric Industrial Co. Ltd. ("Imasen Japan") from Imasen Philippines Manufacturing Corporation ("Imasen Phils") are subject to income tax of 10 percent preferential rate 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 ("Philippines-Japan tax treaty") , as amended by a Protocol . 1 Facts It is represented that Imasen Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Komaki Tax Office of Japan on April 20, 2012; that Imasen Japan is situated at No. 1 Aza-Kakihata, Inuyama, Aichi-pref, Japan; that Imasen Japan is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 28, 2012; and that, on the other hand, Imasen Phils is a domestic corporation situated at 101 East Main Avenue, Laguna Technopark, Bian, Laguna, Philippines. It is further represented that, based on the Certificate issued by the Corporate Secretary of Imasen Phils dated March 22, 2012, during the regular meeting of the Board of Directors of Imasen Phils last March 6, 2012, approved the declaration of cash dividends to its stockholders in the total amount of Twenty One Million Three Hundred Forty Thousand Three Hundred Twelve and 50/100 Pesos (P21,340,312.50) from Imasen Phils earned surplus as of December 2011 and payable on March 29, 2012; that Imasen Japan owns 146,246 common shares of stock with a par value of P1,000.00 per share equivalent to 90% of the total outstanding shares of Imasen Phils since April 17, 2008; and that per notarized outgoing foreign remittance dated March 29, 2012 a cash dividend for the year 2012 was remitted also March 29, 2012 to Imasen Japan thru Bank of Tokyo-Mitsubishi UFJ-Manila Branch. aCHcIE It is finally represented that the dividends subject of the above application 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 Affidavit issued by the Accounting Assistant Manager of Imasen Phils dated March 28, 2012. Ruling 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 Imasen Japan , 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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the 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 connection, paragraphs 1, 2, 3 and 5, Article 10 of the Philippines-Japan tax treaty, as amended, 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 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" Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. IDSaAH Accordingly, considering that Imasen Japan holds directly at least 10 percent of the total shares of stock of Imasen Phils or 90% during the period of six months immediately preceding the date of payment of the dividends or since April 17, 2008, such dividends paid by Imasen Phils to Imasen Japan are subject to income tax at the reduced rate of 10 percent of 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. 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 .