ITAD BIR Ruling No. 103-15

March 27, 2015 ITAD BIR RULING NO. 103-15 Article 10, Philippines-Japan tax treaty, as amended SDE (Philippines) Corp. IWSPC Annex Building Luisita Industrial Park Special Export Processing Zone San Miguel, Tarlac City 2301 Attention: Mr. Noel V. Mercado Vice President and General Manager Gentlemen : This refers to your Tax Treaty Relief Application filed on August 2, 2011, on behalf of SD Engineering Co. Ltd. ("SDE-Japan") requesting confirmation that dividends paid by SDE (Philippines) Corporation ("SDE-PH") to SDE-Japan are subject to the 10 percent preferential tax rate 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 SDE-Japan , with address at 1-14 Nishisuehiro-cho, Yokkaichi, Mie, 510-8503, Japan, is a resident of Japan, under the provisions of the Philippines-Japan tax treaty per the Residence Certificate issued by the District Director of Yokkaichi Tax Office on June 28, 2010; that SDE-Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated October 6, 2011; and that SDE-PH, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Phase Luisita Industrial Park Special Export Processing Zone, San Miguel, Tarlac City 2301. It is also represented, per Corporate Secretary's Certificate issued by SDE-PH dated August 1, 2011, that the Board of Directors of SDE-PH approved cash dividends calculated at 70% of year 2010 Net Income amounting to US$562,140.35 which shall be shared by the stockholders in accordance with their capital interest and were paid on July 31, 2011; that as of October 27, 2004, SDE-Japan is the stockholder of 2,399,800 common shares valued at Php10.00 each for a total of par value of Php23,998,00.00, which constitutes 60% shares in SDE-PH. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by SDE-PH dated September 26, 2011. 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: TaIHEA "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 interests, 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) and (d) above: * 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 provides that: "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. DaCTcA 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. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State." 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. Considering that SDE-Japan , a resident of Japan with no fixed based of business in the Philippines, owns 2,399,800 common shares of SDE-PH consisting of 60 percent of the total shares issued by SDE-PH, and has held the same since October 27, 2004, which is more than six (6) months immediately preceding the date of payment of cash dividend on July 31, 2011, this Office is of the opinion and so holds that the dividends paid by SDE-PH to SDE-Japan 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. 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