ITAD BIR Ruling No. 100-14

June 30, 2014 ITAD BIR RULING NO. 100-14 Article 10, Philippines-Japan tax treaty, as amended Follosco Morallos & Herce 25th Floor, 88 Corporate Center 141 cor. Valero and Sedeno Sts. Salcedo Village, Makati City Attention: Rachel P. Follosco Gentlemen : This refers to your Tax Treaty Relief Application filed August 22, 2011, on behalf of KUBOTA CORPORATION ("KUBOTA"), requesting confirmation that dividends received by KUBOTA from KUBOTA PHILIPPINES (formerly Kubota Agro-Industrial Machinery Phils., Inc.) ("KUBOTA Philippines") are subject to the preferential tax rate of 10 percent 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 effective January 1, 2009. Facts It is represented that KUBOTA is a corporation organized and existing under the laws of Japan and is a resident of Japan within the meaning of the Philippines-Japan tax treaty, based on its Articles of Incorporation and on the Certificate of Residence issued by the Tax Authority of Japan; that KUBOTA is situated in 2-47 Shikitssuhigashi, I-Chome, Naniwa-ku, Osaka, Japan; that KUBOTA has a branch office licensed to engage in business in the Philippines on February 10, 1999; that, to date, no petition for the withdrawal or cancellation of such license has been filed; and that, on the other hand, KUBOTA Philippines is a corporation organized and existing under the laws of the Philippines situated at Kubota Center, No. 155 Panay Avenue, South Triangle, Quezon City, Philippines. It is further represented that on May 14, 2011, the Board of Directors of KUBOTA Philippines , duly approved a resolution declaring cash dividends of P0.735 per share as regular cash dividends to its stockholders of record as of May 25, 2011, payable on or before September 30, 2011; and that since 1997, KUBOTA has held 15,000,000 shares in KUBOTA Philippines representing 15 percent of the authorized capital stock of KUBOTA Philippines , based on the Certificate issued by the same Corporate Secretary on August 12, 2011; and that said dividend were paid on September 30, 2011 thru a telegraphic transfer with Security Bank-Congressional Branch based on the notarized certification issued by the KUBOTA Philippines dated November 14, 2013. DHATcE It is finally represented that KUBOTA Philippine Branch does not use or hold for use in the conduct of its trade or business any shares of stock of KUBOTA Philippines ; that all gains arising from these shares inure solely to the benefit of KUBOTA and that KUBOTA Philippines Branch is not a material factor in the realization of such gain. Ruling In reply, please be informed that dividends derived by a nonresident foreign corporation are generally taxable under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, which provides: "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-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such dividends may be exempt (or partially exempt) from income tax pursuant to a treaty obligation to which the Philippine government is bound. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: 1 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 tax treaty, Article 10 of the Philippines-Japan tax treaty, as amended, 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. TcDIaA 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 above, the Philippines may tax dividends paid by a domestic company to a company resident of Japan at a rate not exceeding 10 percent of the gross amount thereof if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. Otherwise, a rate of 15 percent applies. In view of the foregoing and considering that, as early as 1997 and as of April 14, 2011 KUBOTA holds 15 percent of the authorized capital stock of KUBOTA Philippines , such dividends to be paid by KUBOTA Philippines to KUBOTA, are subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-lida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents. (G.R. No. 76573 dated September 14, 1989), it was held that: "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 that 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 of the branch. Consequently, the taxpayer is 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." EcDSTI Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by KUBOTA Philippines to KUBOTA shall be considered as income of KUBOTA as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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. TITLE II TAX ON INCOME.