ITAD BIR Ruling No. 108-14

July 21, 2014 ITAD BIR RULING NO. 108-14 Article 10, Philippines-Japan tax treaty JFE Shoji Trade Philippines, Inc. 17th Floor, 6788 Ayala Avenue Building Oledan Square, Makati City Attention: Mr. Koichiro Oda President Gentlemen : This refers to your application for tax treaty relief filed on June 24, 2013 requesting confirmation that dividends paid by JFE Shoji Trade Philippines, Inc. ("JFE Philippines") (formerly: Kawasho Philippines, Inc. ) to JFE Shoji Trade Corporation ("JFE Japan") (formerly: Kawasho Corporation ) are subject to income tax at the 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") as amended by a Protocol. 1 Facts JFE Japan is a corporation organized and existing under the laws of Japan and is a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Kita Tax Office in Japan on October 8, 2013. JFE Japan is located at 1-6-20 Doujima, Kita-Ku, Osaka, Japan. Based on its Certificate of Withdrawal of License, JFE Japan was once licensed by the Securities and Exchange Commission to transact business in the Philippines through a branch office (under the name JFE Shoji Trade Corporation-Manila Branch ) but the same has been revoked by the Commission on October 3, 2012. On the other hand, JFE Philippines is a domestic corporation located at 17th Floor, 6788 Ayala Avenue Building, Oledan Square, Makati City, Philippines. According to the Corporate Secretary's Certificate issued by JFE Philippines on June 27, 2013, the Board of Directors of JFE Philippines (during a special meeting on June 20, 2013) declared cash dividends amounting to P1,354,892.00 in favor of the company's stockholders of record as of December 31, 2012. The dividends will be distributed based on the stockholders' holdings as of June 30, 2013. CTAIHc Based on another Secretary's Certificate issued on September 4, 2013 and the company's General Information Sheet for 2013, JFE Japan holds 99.99 percent of the total outstanding shares of stock of JFE Philippines as described below: Number Value Acquisition Mode of Percentage of Date Acquisition Ownership 211,835 P21,183,500.00 Aug. 7, 1995 Direct 99.99 percent Dec. 14, 1999 Subscription Based on the Certification issued by Bank of Tokyo-Mitsubishi UFJ Manila Branch 2 on July 18, 2013, the dividends amounting to P1,354,892.00 (US$31,509.11) were remitted to JFE Japan on June 28, 2013 by telegraphic transfer. Finally, it is represented that the issue or transaction subject of the above application is 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 Sworn Certification issued by the President of JFE Philippines on June 24, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: HCSEIT "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" In connection thereto, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." TAHIED However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." With respect to a treaty, paragraphs 1 and 2, Article 10 of the Philippines-Japan tax treaty, as amended, provide relief to dividends paid by a domestic company in the Philippines to another domestic company in Japan, to wit: "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: DTAHSI 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." Under Article 10, such dividends may be taxed in the Philippines at a rate not to exceed 10 percent if the Japanese company recipient of dividends holds directly at least 10 percent of the voting shares or the total shares of the Philippine company paying the dividends, for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the dividends are subject to 15 percent. Accordingly, since JFE Japan holds directly at least 10 percent of the total shares of JFE Philippines during a period of six months immediately preceding the date of payment of the dividends on June 28, 2013, where JFE Japan actually holds 99.99 percent of these shares since December 14, 1999 , such dividends paid by JFE Philippines to JFE Japan are subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (a), Article 10 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 Footnotes 1. Protocol Amending 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 effective January 1, 2009. 2. Located at 15th Floor, 6788 Ayala Avenue Building, Oledan Square, Makati City, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.