ITAD BIR Ruling No. 098-14

June 30, 2014 ITAD BIR RULING NO. 098-14 Article 10, Philippines-Japan Tax Treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Carolina A. Racelis Principal, Tax Services Gentleman : This refers to your tax treaty relief application filed on May 20, 2013 requesting confirmation that the dividend payment of INAPHIL, Incorporated ("INAPHIL") to INA Research, Inc. ("INA Research") is subject to the preferential tax rate of 10 percent pursuant to 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 ("Philippines-Japan tax treaty, as amended"). It is represented that INA Research , with principal office address at 2148-188 Nishiminowa Ina-City Nagano Pref, Japan, is corporation organized and existing under the laws of Japan and is resident of Japan within the meaning of the Philippines-Japan tax treaty per Certificate issued by the Ina Tax Office on April 30, 2013; that INA Research is not registered as corporation or as partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 16, 2013; that, on the other hand, INAPHIL is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at Unit 203, 2501, Civic Prime, Civic Drive, Filinvest Corporate City, Alabang, Muntinlupa City. It is also represented, based on the Corporate Secretary's Certificate issued by INAPHIL on May 16, 2013, that INA Research owns 17,998 preferred shares of stock in INAPHIL constituting 40%, ownership therein, worth Php35,276,080.00; that the shares of INA Research in INAPHIL were acquired by cash investments on April 26, 1994; that during the 19th Organizational Meeting held on May 15, 2013, the Board of Directors of INAPHIL declared cash dividend in the amount of Thirty-Five Million Two Hundred Seventy-Six and Eighty pesos (Php35,276,080.00) in favor of Ina Research as majority of preferred shareholders on the basis of the outstanding capital stock held as of May 15, 2013; and that dividend payments were made by INAPHIL to INA Research on May 24, 2013 per Bank Certification issued by RCBC on May 24, 2013. HIAEaC It is finally represented, based on the Sworn Statement by the same Corporate Secretary on May 9, 2013, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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. 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 . . . dividends, rents, royalties . . .: 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 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. xxx xxx xxx" In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It states that: ADScCE "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. 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. xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. Considering that since April 26, 1994, or more than 6 months immediately preceding date of payment of dividend, INA Research owns 17,998 preferred shares of stock in INAPHIL constituting 40% ownership therein, which is more than the 10 percent shareholding requirement of the total shares issued by that company, as shown in the certification issued by the Corporate Secretary of INAPHIL dated May 16, 2013, then the dividends paid to INA Research by INAPHIL are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. CASIEa 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