ITAD BIR Ruling No. 095-15

March 25, 2015 ITAD BIR RULING NO. 095-15 Article 10, Philippines-Japan Tax Treaty JGLaw SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Attention: Jose V. E. Jimenez Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 29 October 2013 , requesting confirmation that the dividend payment by Nachi Pilipinas Industries, Inc. ("NPII") to Nachi-Fujikoshi Corp. ("NFC") is subject to the preferential tax rate of 10 percent (10%) pursuant to Article 10 (2) (a) 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 a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that NFC is a corporation organized and existing under the laws of Japan and is a resident thereof with business address at 1-1-1 Fujikoshi-Honmachi, Toyama, Japan, as evidenced by the Certificate of Residence issued by the District Director of Toyama Tax Office, Japan dated 17 September 2013, which was authenticated by the Vice Consul of the Republic of the Philippines in and for Tokyo, Japan, executed on 30 September 2013; that NFC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated 24 September 2013; and that, on the other hand, NPII is a corporation organized and existing under the laws of the Philippines with principal address at 1st Avenue, Maalac Compound, Taguig, Metro Manila. It is further represented that in a special meeting of the Board of Directors of NPII held on 30 September 2013, the latter declared cash dividends in the amount of TWENTY EIGHT MILLION PESOS (PhP28,000,000.00) for all stockholders of record as of 30 September 2013; that since 23 November 1999, NFC is the legal and beneficial owner of FORTY NINE THOUSAND FOUR HUNDRED NINETY-FIVE (49,995) n shares and FIVE (5) nominal shares with a total of FIFTY THOUSAND (50,000) shares of the outstanding stock of NPII, with par value of PhP1,000.00 per share amounting to PhP50,000,000.00, or equivalent to 100% of its outstanding shares, as evidenced by the Corporate Secretary's Certificate executed on 25 October 2013. It is further represented that the subject dividend payment by NPII was made through the Mizuho Bank, Ltd. Manila Branch ("Mizuho") in favor of NFC, the amount of FIFTY SIX MILLION EIGHT HUNDRED FORTY SIX THOUSAND THREE HUNDRED EIGHTY SEVEN Japanese Yen (JPY56,846,387.00), on 31 October 2013, as evidenced by a Certification executed by Mizuho on 06 November 2013. It is finally represented that the dividend subject of this TTRA is 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 Certification issued by the President of NPII executed on 16 October 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividend payments made to NFC are subject to income tax at the rate of 30 percent, thus: EIcSDC "SEC. 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 percent (30%) 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 However, under Section 32 (B) (5) of the Tax Code, 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: "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." With respect to a treaty, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 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: (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." Under paragraph 2 (a) 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 10% of the gross amount of the dividends if the company recipient holds directly at least 10% of either 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. On the other hand, a tax of 15% of the gross amount of the dividends shall be imposed on all other cases. EaScHT Accordingly, since NFC holds 100% of the outstanding capital stock of NPII from 23 November 1999, this Office is of the opinion and so holds that the dividend paid by NPII to NFC is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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. Date of effectivity, January 1, 2009. n Note from the Publisher: Copied verbatim from the official copy. Discrepancy between amount in words and in figures. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.