ITAD BIR Ruling No. 105-13

April 11, 2013 ITAD BIR RULING NO. 105-13 Article 10 (Dividends) Philippines-Japan tax treaty; BIR Ruling No. ITAD 332-11 Nidec Philippines Corporation 136 North Science Avenue Ext., SPEZ Laguna Technopark, Bian, Laguna Attention: Makoto Aratake Authorized Representative This refers to your Tax Treaty Relief Application (TTRA) filed on 31 August 2012 requesting confirmation that the dividends paid by Nidec Philippines Corporation ("Nidec-Philippines ") to Nidec Corporation ("Nidec-Japan") are subject to the preferential tax treaty 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) . It is represented that Nidec-Japan is a corporation residing in Japan with principal office at 338 Tonoshiro-cho, Kuze, Minami-ku, Kyoto 601-8205, Japan, based on the notarized and consularized Certificate of Status of Taxable Person issued by the Ministry of Foreign Affairs of Japan dated 30 July 2012. The company Nidec-Japan is organized and existing under the laws of Japan based on the notarized and consularized corresponding Articles of Incorporation. Nidec-Japan is not registered in the Philippines as a corporation or as a partnership based on the Certificate of Non-Registration of Company dated 28 August 2012 and issued by the Securities and Exchange Commission. On the other hand, Nidec-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 136 North Science Avenue Ext., SPEZ Laguna Technopark, Bian, Laguna, Philippines. The company Nidec-Philippines is the duly authorized agent of Nidec-Japan for the purpose of securing a TTRA based on the Special Power of Attorney dated 18 August 2012. It is further represented that on 14 August 2012, the Board of Directors of Nidec-Philippines declared cash dividends in the amount of US$35,000,000.00 payable to all the stockholders of record of Nidec-Philippines as of 31 July 2012 at US$2.50 per share, payable on 21 September 2012. Nidec-Japan holds 13,999,995 shares constituting 99.99% of the issued and outstanding shares of Nidec-Philippines and Nidec-Japan directly holds its respective shares since 14 November 2001 or more than 6 months immediately preceding the date of payment on or before 21 September 2012 per Corporate Secretary's Certificate issued by the Corporate Secretary of Nidec-Philippines on 21 September 2012. It is further represented that on 21 September 2012, Nidec-Philippines paid cash dividends to Nidec-Japan in the amount of US$31,499,988.75 under Account No. 0000333 in Bank of Tokyo Mitsubishi UFJ Ltd. based on a duly notarized Certification of Remittance issued by the International Operations Department of the said bank dated 17 October 2012. ACaEcH 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 a Sworn Statement by the Vice-President of Nidec-Philippines dated 17 August 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended, 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 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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax or partially exempt, if subjected to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. The aforementioned provision of law states: "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." Correlative to Section 32 (B) (5) of the NIRC of 1997, as amended is the Philippines-Japan tax treaty. Article 10 thereof provides: "Article 10 Dividends 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 the 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. 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 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. 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 above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Accordingly, since Nidec-Japan holds directly 99.99% of the total shares of stock of Nidec-Philippines during the period of more than 6 months immediately preceding the date of payment of the dividends, this office is of the opinion and so holds, that dividends paid by Nidec-Philippines to Nidec-Japan is subject to income tax at the rate of 10% of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended (BIR Ruling No. ITAD-332-11 dated 23 December 2011). 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