ITAD BIR Ruling No. 109-11

April 7, 2011 ITAD BIR RULING NO. 109-11 Article 10 (2) (a), Philippines-Japan Tax Treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-011-10; BIR Ruling No. ITAD 035-10 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Edward L. Roguel Tax Partner Gentlemen : This refers to your tax treaty relief application filed on March 3, 2011, on behalf of Kawasaki Heavy Industries, Ltd. ("Kawasaki"), requesting confirmation that dividend payments made by KHI Design & Technical Service, Inc. ("KDTSI") to Kawasaki are subject to 10 percent preferential tax rate pursuant to the amended 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"). cCAIES It is represented that Kawasaki, with address at 1-1, 13-chome, Higashi-kawasaki-cho, chuo-ku, Kobe, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Domicile issued by the District Director of Kobe Tax Office on December 20, 2010; that Kawasaki 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 December 16, 2010; and that KDTSI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located 20 Floor, 6788 Ayala Avenue, Oledan Square, Makati City. It is also represented, per Secretary's Certificate dated March 1, 2011, that Kawasaki is the stockholder on record of 64,950 common shares with a par value of Php100.00, for a total par value of Php6,495,000.00, representing 99.92% of the outstanding and voting shares of KDTSI; and that these shares were acquired by Kawasaki , as follows: Date Number of shares Par value December 27, 1996 34,950 common shares Php3,495,000.00 October 31, 2002 30,000 common shares Php3,000,000.00 Total Shares 64,950 common shares Php6,495,000.00 ============= It is further represented that at the Special Meeting of the Board of Directors of KDTSI on January 7, 2011, the Board unanimously adopted and approved the declaration of a cash dividend of Php12,000,000.00 in favor of all stockholders of record as of December 31, 2010, payable on or before March 31, 2011. Finally, it is represented 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 per the Sworn Statement issued by KDTSI dated December 3, 2010. 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%). TcHCDI 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. Its Article 10 provides that: "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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State." 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 ten 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. DHaECI Considering that Kawasaki owns more than the 10 percent of the total shares issued by KDTSI, and has held the same since October 31, 2002, which is more than six (6) months immediately preceding the date of payment of cash dividend on March 31, 2011, this Office is of the opinion and so holds that the dividends paid by KDTSI to Kawasaki are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (a) 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) 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