ITAD BIR Ruling No. 107-11

April 7, 2011 ITAD BIR RULING NO. 107-11 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 087-83; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. DA-ITAD 041-99; BIR Ruling No. DA-ITAD-047-99; BIR Ruling No. DA-ITAD-005-10 Air Water Philippines, Inc. 119 East Main Avenue Special Economic Zone 2 Laguna Technopark Bian, Laguna 4024 Attention: Pericles C. Consunji Corporate Secretary Gentlemen : This refers to your letter dated May 18, 2009, 1 requesting confirmation that the dividends paid by Air Water Philippines, Inc. ("AWPI") to Air Water, Inc. ("AWI") are subject to a 10 percent preferential tax rate 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") . DHIETc It is represented that AWI, with address at 1-8 Nakahama-Cho, Amagasaki-Shi, Hyogo, 660-0091 Japan, is a resident of Japan based on its Articles of Incorporation; that AWI 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 (SEC) dated February 23, 2009; that AWPI, on the other hand, is a domestic corporation registered with the SEC under Registration No. CS2002-54764, and with principal office at 119 East Main Avenue, Special Economic Zone, Laguna Technopark, Bian, Laguna; that AWPI is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 02-055 dated October 23, 2002; and that AWPI is engaged principally in (1) heat treatment of metal shafts to be used as parts of hard disk drives of computers and other electronic products such as house appliances, etc.; and (2) surface treatment of metal shafts to be used as parts of hard disk drives of computers and other electronic products such as house appliances, etc. It is also represented that on July 9, 2007, during the annual stockholders meeting of AWPI, a resolution was approved authorizing AWPI to declare cash dividends to stockholders of record as of July 31, 2007, in the amount of FIFTEEN MILLION FORTY-EIGHT THOUSAND PESOS (P15,048,000.00), and on November 30, 2007 in the amount of TEN MILLION THIRTY-TWO THOUSAND PESOS (P10,032,000.00) in favor of its stockholders of record as that date, based on the Certificate issued by the Corporate Secretary of AWPI on April 21, 2009; that, moreover, on July 3, 2008, during the annual stockholders meeting of AWPI a resolution was approved authorizing AWPI to declare cash dividends to its stockholders of record as of July 31, 2008, in the amount of THIRTEEN MILLION FOUR HUNDRED SEVENTY-ONE THOUSAND SIX HUNDRED SIXTY PESOS and EIGHTY-FIVE CENTAVOS (P13,471,660.85), based on the Certificate issued by the same Corporate Secretary on March 4, 2009; that as of January 31, 2006, AWI owns 109,995 of the 110,000 common shares of stock of AWPI, each share with a par value of One Hundred Pesos (P100.00) or amounting to Ten Million Nine Hundred Ninety-Nine Thousand Five Hundred Pesos (P10,999,500.00), representing 99.8% of the voting shares of AWPI, based on Certificate issued by the same Corporate Secretary on November 18, 2009; and that the dividends were paid on July 31, 2007 November 30, 2007, and on July 31, 2008 and September 29, 2008, based on the Certification issued by the same Corporate Secretary on February 11, 2010. It is finally represented that the transactions subject of the request for 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 Certification issued by the same Corporate Secretary on July 10, 2009. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general to dividends derived in the Philippines by nonresident foreign corporation. It 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 . . . 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: "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: CaAIES 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, you invoke the provisions of the Philippines-Japan tax treaty. Article 10 thereof provides, viz. : "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) 25 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. 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 dividends paid by a domestic company to a resident of Japan at a rate not exceeding (a) 10 percent of the gross amount of the dividends if the beneficial owner of the dividends is a company which holds directly at least 25 percent of the voting shares of the domestic company paying the dividends or of the total shares of that company period of six (6) months immediately preceding the date of payment of the dividends, (b) 10 percent of the gross amount of the dividends if the domestic company is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and (c) 25 percent of the gross amount of dividends in all other cases. Therefore, considering that AWI holds directly at least 25 percent (in fact, 99.8 percent) of the common (voting) shares of AWPI, during the period of six months (specifically, since January 31, 2006, or even earlier) immediately preceding the dates of payments of the dividends in question, such dividends paid by AWPI to AWI are subject to income tax at the rate of 10 percent of the gross amount thereto, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. 087-83 dated 17 May 1983; BIR Ruling No. ITAD-008-99 dated 20 July 1999; BIR Ruling No. ITAD-020-99 dated 18 August 1999; BIR Ruling No. DA-ITAD-041-99 dated 3 November 1999; BIR Ruling No. DA-ITAD-047-99 dated 9 December 1999; ITAD Ruling No. DA-ITAD-005-10 dated January 22, 2010) 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. DaTISc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Received by this Office July 01, 2009.