ITAD BIR Ruling No. 106-11

April 7, 2011 ITAD BIR RULING NO. 106-11 Article 10, Philippines-Japan Tax Treaty, as amended; Section 28, Tax Code of 1997; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Platon Martinez Flores San Pedro Leao Law Office 6th Floor Tuscan Building 114 V.A. Rufino Street 1229 Makati City Attention: Anthony Brett M. Abenir Gentlemen : This refers to your letter dated May 12, 2009, on behalf of Kohwa Philippines, Inc. (hereinafter referred to as "Kohwa" ), requesting confirmation that the cash dividends to be paid by Kohwa to JFE Shoji Trade Corporation (hereinafter referred to as "JFE") are subject to the preferential tax rate of 10 percent based on Article 10 (2) (a) of 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 which took effect on January 1, 2009 ("Philippines-Japan tax treaty, as amended") . cDCHaS It is represented that JFE is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate dated May 7, 2009 issued by the Kita Tax Office; that it is situated at 1-6-20 Doujima, Kita-Ku, Osaka, Japan; that JFE is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated May 7, 2009; that Kohwa , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at #6 Mountain Drive, Light Industry & Science Park (LISP 2) Special Export Processing Zone, Brgy. Real, Calamba City, Laguna; that JFE maintains a branch in the Philippines under the name of JFE Shoji Trade Corporation-Manila Branch ("JFE Manila") , but the said entity has not been conducting business operations for the last two years as per certification issued by JFE Shoji Trade Corporation-Manila Branch. It is also represented, per Secretary's Certificate dated September 2, 2009, that as of May 31, 2009 JFE's shareholdings is 499,995 out of 500,000 total shares of Kohwa , which is equivalent to 99.99% ownership in Kohwa ; that JFE Manila has not been conducting business operations for the last two years and does not use or hold for use the Kohwa shares in the conduct of JFE Manila's trade or business; that JFE Manila is not a material factor in the realization of dividends paid by Kohwa as per certification issued by the General Manager dated August 25, 2010; that at a special meeting on April 14, 2009 of the Board of Directors of Kohwa , they unanimously adopted and approved that a cash dividend in the amount of US$3,000,000,00.00 be declared in favor of all stockholders of record as of April 14, 2009 payable on or before May 31, 2009; and 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides as follows: "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: TCDHaE "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, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which reads: "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 during the period of six (6) months immediately preceding the date of payment of the cash dividend which is May 31, 2009, JFE owns 99.99% shares in Kohwa , 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 Kohwa dated September 2, 2009, then the dividends paid to JFE by Kohwa are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 of the Philippines-Japan tax treaty, as amended (BIR Ruling No. ITAD 35-10 dated September 14, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 7-10 dated May 20, 2010) HAEDCT 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