ITAD BIR Ruling No. 103-14

July 4, 2014 ITAD BIR RULING NO. 103-14 Article 10, Philippines-Japan tax treaty Asia Pacific Business Legal Consulting 2nd Floor Building B Mactan Marina Mall Mactan Economic Zone I Ibo, Lapu-lapu City, Cebu Attention: Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your tax treaty relief application filed on July 10, 2012 requesting for confirmation that dividends paid by Tsuneishi Holdings (Cebu), Inc. ("Tsuneishi PH") to Tsuneishi Holdings Corporation ("Tsuneishi JP") are subject to a 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Tsuneishi JP is a foreign corporation organized and existing under the laws of Japan with its principal office address at 1083 Tsuneishi Numakuma-cho, Fukuyama City, Hiroshima-Prefecture, Japan based on its Certificate of Status of Taxable Person issued by the District Director of Fukuyama City, Hiroshima, Japan Tax Office on July 5, 2012; that Tsuneishi JP is not registered in the Philippines based on the Certification issued by the Securities and Exchange Commission on June 21, 2012; and that on the other hand, Tsuneishi PH is a domestic corporation situated at West Cebu Industrial Park-Special Economic Zone, Buanoy, Balamban, Cebu City. It is further represented that on July 2, 2012, Tsuneishi PH , through its Board of Directors, passed and approved the declaration of cash dividends in the amount of PhP411,897,079.00 to be taken out of its accumulated and unrestricted retained earnings as of calendar year ending December 31, 2011 based on the Certificate issued by the Corporate Secretary of Tsuneishi PH on July 9, 2012; that since December 29, 2011, Tsuneishi JP holds 825,999,995 shares in Tsuneishi PH , representing 99.99% ownership, based on the same Secretary's Certificate; and that payment of the said dividends was made on July 27, 2012, based on the Bank Certification issued by RCBC on July 31, 2012. TCDHaE It is finally represented that the dividends subject of this ruling are 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 Affidavit issued by the President of Tsuneishi PH on July 9, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividends paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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 . . ., dividends, . . .: 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 Code provides that 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: "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. SHacCD xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, 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 25 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. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. AaITCH xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 25 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. In this case, considering that Tsuneishi JP holds 99.99 percent of the total shares of Tsuneishi PH during a period of six months immediately preceding the date of payment of the dividends, in fact since December 29, 2011, this Office is of the opinion and so holds that such dividends paid by Tsuneishi PH to Tsuneishi JP are subject to income tax at a preferential rate of 10 percent based on 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. Protocol Amending 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 effective January 1, 2009.