ITAD BIR Ruling No. 096-14

June 30, 2014 ITAD BIR RULING NO. 096-14 Article 10, Philippines-Japan tax treaty, as amended; Article 10, Philippines-Singapore tax treaty Nissin-Universal Robina Corporation CFC Building, E. Rodriguez Jr. Avenue Bagong Ilog, Pasig City Attention: Rolando L. Figueroa Jr. Chief Accountant Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on January 29, 2013, on behalf of Mitsubishi Tokyo ("Mitsubishi-Japan") and Nissin Foods (Asia) Pte. Ltd. ("Nissin-Singapore") , requesting confirmation that dividends paid by Nissin-Universal Robina Corporation ("Nissin-Phil") to Mitsubishi-Japan and Nissin-Singapore are subject to preferential tax rate of 10 percent pursuant to Article 10 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 Protocol 1 ("Philippines-Japan tax treaty, as amended") , and 15 percent preferential tax rate pursuant to Article 10 of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") , respectively. It is represented that Mitsubishi-Japan , with address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan, is a resident of Japan for the purpose of the Philippines-Japan tax treaty per the Residence Certificate issued on February 3, 2012 by the District Director of Kojimachi Tax Office; that it was licensed to established its branch office in the Philippines ("Mitsubishi-Philippine Branch") per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated January 11, 2013; that per Affidavit dated December 28, 2012 issued by Mitsubishi-Philippine Branch, Mitsubishi-Philippine Branch has no investments nor owns shares of stocks with Nissin-Phil ; that Mitsubishi-Japan acquired the Nissin-Phil shares and the said acquisition was made directly by Mitsubishi-Japan ; that Mitsubishi-Philippine Branch likewise does not use or hold for use in the conduct of its trade or business any shares of stock in Nissin-Phil and consequently, all gains inured to the sole benefit of Mitsubishi-Japan and Mitsubishi-Philippine Branch did not received any of the gains. TIADCc It is also represented that Nissin-Singapore is a corporation organized and existing under the laws of Singapore and is a resident thereof, having its registered address at 16 Chin Bee Rd, Jurong Town, Singapore 619826 based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated December 12, 2012; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated January 18, 2013; and that, on the other hand, Nissin-Phil is a corporation, organized and existing under the laws of the Philippines with principal address at CFC Building, E. Rodriguez Jr. Avenue, Bagong Ilog, Pasig City. It is further represented, that on December 7, 2012, a resolution was adopted and approved by the Board of Directors of Nissin-Phil declaring cash dividends of One Hundred Sixty Million Philippine Peso (Php160,000,000.00) for shareholders of record as of December 31, 2012, payable in the first quarter of 2013; that based on a Certification issued on January 29, 2013 by the Corporate Secretary of Nissin-Phil, Mitsubishi-Japan acquired on various dates beginning February 13, 2008 (including one (1) share of Mitsubishi-Japan 's nominee shareholder which was acquired on May 1, 2010) a total of 18,900,000.00 common shares which represents 10% of the total subscribed capital of Nissin-Phil ; that Nissin-Singapore also acquired through subscription on various dates beginning September 30, 2009 (including two (2) shares of Nissin-Singapore 's nominee shareholders which was acquired on March 21, 2010 and March 22, 2012, respectively) a total of 47,250,000.00 common shares which represents 25% of the total subscribed capital of Nissin-Phil ; and that, based on a proof of telegraphic transfer from Banco de Oro, such dividends were remitted to Mitsubishi-Japan and Nissin-Singapore on February 1, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended applies in general to income derived in the Philippines by a nonresident foreign corporation. It provides: "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%)." cIECaS However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." The provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: "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: HICcSA 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. xxx xxx xxx 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." DSCIEa Based on the aforequoted provisions, the Philippines may tax the dividends paid by a 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 of 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 in all other cases. However, under paragraph 5 of Article 10, the Philippines, being the source of the dividends, is not obliged to limit the tax rates on dividends under paragraphs 2 and 3 of the article if the holding in respect of which the dividends are paid is effectively connected with a permanent establishment which Mitsubishi-Japan has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, Mitsubishi-Philippine Branch , is considered a permanent establishment of Mitsubishi-Japan , thus: " Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ; c) an office; d) a factory; STcHDC e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. . . ." (Underscoring ours) On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010 p. 193) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: " 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) IAcDET Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , dividends derived by a foreign corporation can become effectively connected with its branch office in the Philippines if the business activities that give rise to such dividends are conducted through the branch office, following the principal-agent relationship theory, thus: " The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory . It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation ." (Underscoring supplied) Accordingly, the holdings in respect of the dividends paid by Nissin-Phil to Mitsubishi-Japan are not effectively connected with Mitsubishi-Philippine Branch since they are paid not in respect of holdings forming part of the assets of Mitsubishi-Philippine Branch or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through Mitsubishi-Philippine Branch . This is because Mitsubishi-Philippine Branch has neither investments nor owns shares of stock in Nissin-Phil ; does not use or hold for use in the conduct of its trade or business any shares of stock in Nissin-Phil; Mitsubishi-Japan acquired such shares in Nissin-Phil directly and without the participation of Mitsubishi-Philippine Branch ; and, dividends arising from these shares inure solely to the benefit of Mitsubishi-Japan and Mitsubishi-Philippine Branch did not receive any of these dividends. Hence, Mitsubishi-Philippine Branch is not a material factor in the realization of dividends received by the Mitsubishi-Japan . SDHETI In view thereof and considering that Mitsubishi-Japan having its shareholdings of 10 percent in Nissin-Phil for more than six months immediately preceding the date of payment of the dividends, said dividends paid by Nissin-Phil to Mitsubishi-Japan are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. Moreover, with regard to the dividends paid by Nissin-Phil to Nissin-Singapore , you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: "Article 10 Dividends 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 State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and CDHcaS b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Considering that Nissin-Singapore holds 25 percent of the total outstanding capital stock of Nissin-Phils during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, the dividends paid to Nissin-Singapore shall be subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. CTDAaE 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol amending treaty took effect on January 1, 2009.