ITAD BIR Ruling No. 097-11

March 15, 2011 ITAD BIR RULING NO. 097-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-007-10 Moriroku Philippines, Inc. 115 North Science Avenue Laguna Technopark, Bian Laguna Attention: Fumiaki Sato President and General Manager Gentlemen : This refers to your tax treaty relief application dated November 18, 2009 and filed on February 24, 2010 requesting confirmation that the dividend payment by Moriroku Philippines, Inc. ("Moriroku-Phil") to Moriroku Technology Company Limited ("Moriroku-Japan") is subject to the 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of the amended 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 (hereafter referred to as the "Philippines-Japan tax treaty, as amended" ). 1 It is represented that Moriroku-Japan with address at 18th Floor, Shin-Aoyama East Building 1-1-1 Minami-Aoyama, Minato-Ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Residence certificate issued by the District Director of Azabu Tax Office dated December 4, 2009; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 1, 2009; and that, on the other hand, Moriroku-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 115 North Science Avenue, Laguna Technopark, Bian, Laguna. It is further represented that, per Secretary's Certificate issued by Moriroku-Phil on August 27, 2010, Moriroku-Japan holds 199,995 shares, which represent 99.99% ownership, in Moriroku-Phil, and which shares were acquired pursuant to the Agreement on Equity Transfer dated October 1, 2008; that at the meeting of the Board of Directors of Moriroku-Phil on July 7, 2009, it was resolved that a cash dividend in the amount of Thirty Million Yen (30,000,000.00) be declared out of the Moriroku-Phil's earned surplus to all stockholders of record as of July 2009, payable on or before March, 2010; that per the notarized Certification issued by Moriroku-Phil dated November 19, 2009, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. CEHcSI 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 dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (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." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It states: "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. HSCcTD 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." 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 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; in all other cases, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. In view thereof and considering that Moriroku-Japan holds directly 99.99% of the shareholdings in Moriroku-Phil, or more than the required minimum shareholdings of 10 percent since October 1, 2008, which is, for a period of more than 6 months immediately preceding the date of payment of dividend on March 15, 2010, the dividends paid by Moriroku-Phil to Moriroku-Japan are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on December 9, 2006, and effective January 1, 2009.