ITAD BIR Ruling No. 107-13

April 11, 2013 ITAD BIR RULING NO. 107-13 Article 10, Philippines-Japan tax treaty, as amended Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on June 22, 2012, on behalf of Sumitomo Osaka Cement Co., Ltd. ("Sumitomo") , requesting confirmation that the dividend payments to it by Holcim Philippines, Inc. ("Holcim") are subject to 15 percent preferential tax rate pursuant to Article 10 (2) (b) 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. ("Philippines-Japan tax treaty, as amended") . It is represented that Sumitomo , with address at 6-28 Rokubancho, Chiyoda-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Residence issued by the District Director of Kojimachi Tax Office on June 1, 2012; that Sumitomo 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 June 26, 2012; and that Holcim , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 7th Floor Two World Square, McKinley Hill, Fort Bonifacio, Taguig City. It is further represented that on May 17, 2012, the Board of Directors of Holcim approved a resolution to declare cash dividends in the amount of Php0.25 per share to all stockholders of record of Holcim as of June 11, 2012; that as of June 11, 2012, Sumitomo holds 594,952,725 common shares with par value of Php1.00 per share in Holcim representing 9.22% of the total subscribed shares in Holcim ; that Sumitomo acquired the said shares in Holcim by initial and additional purchases from Davao Union Cement Corporation and Union Cement Corporation on various dates starting October 14, 1994 to December 16, 2002; that the said dividends were paid out to Sumitomo on June 25, 2012 as evidenced by a Certification issued by Standard Chartered Bank on August 28, 2012; and that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. aDICET 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: "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: 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. In the instant case, considering that Sumitomo holds 9.22% percent of the total outstanding capital stock of Holcim this Office is of the opinion and so holds that the cash dividends paid by Holcim to Sumitomo shall be subject to the preferential tax rate of 15 percent based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. IDScTE This ruling is issued on the basis of the foregoing 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