ITAD BIR Ruling No. 109-13

April 11, 2013 ITAD BIR RULING NO. 109-13 Article 10 (Dividends) Philippines-Japan tax treaty Toyota Boshoku Philippines Corp. 111 Commerce Road, Phase 2, Industrial Zone, Laguna Technopark, Bian, Laguna Attention: Mr. Mamoru Matsunaga Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 24 July 2012 requesting confirmation that dividends paid by Toyota Boshoku Philippines Corporation ("Toyota-Philippines") to Toyota Boshoku Corporation ("Toyota-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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") . It is represented that Toyota-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 1-1 Toyoda-cho, Kariya-shi, Aichi-ken 4, Japan 448-8651 and is a company engaged in the business of manufacturing, processing and sales of parts and accessories for machinery and equipment for transportation, manufacturing, processing and sales of cotton yarn fabrics, manufacturing and sales of chemical products, among other purposes based on the notarized and consularized Residence Certificate issued by Ministry of Foreign Affairs of Japan and Articles of Incorporation of Toyota-Japan. The company Toyota-Japan is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 18 August 2012. Toyota-Philippines ,on the other hand, is a domestic corporation with office address at 111 Commerce Road, Phase 2, Industrial Zone, Laguna Technopark, Bian, Laguna. The primary purpose of Toyota-Philippines is to engage in the manufacture and sale of automobile seats and interior parts, components and parts. Toyota-Philippines is authorized by Toyota-Japan to act on its behalf relative to application for tax treaty relief based on a notarized and consularized Special Power of Attorney. It is further represented that Toyota-Japan owns 95% of the authorized capital stock of Toyota-Philippines amounting to One Million Two Hundred Six Thousand Four Hundred Ninety Five (1,206,495) shares valued at One Hundred Twenty Million Six Hundred Forty Nine Thousand Five Hundred Pesos (Php120,649,500.00) since 16 November 2004, based on the notarized Secretary's Certificate of Toyota-Philippines . On 29 June 2012, Toyota-Philippines declared cash dividends in the total amount of Twenty Two Million Five Hundred Forty One Thousand Two Hundred Eighty Six Pesos (Php22,541,286.00) to be distributed among the stockholders of record as of 29 June 2012 to be payable on 31 July 2012 based on the Board Resolution Declaration of Dividends issued by the Corporate Secretary of Toyota-Philippines . Further, on 31 July 2012, Toyota-Philippines remitted the amount of Nineteen Million Two Hundred Seventy Two Thousand Seven Hundred Ninety Nine Pesos and Fifty Three Centavos (Php19,272,799.53) based on a duly notarized Certification issued by Rizal Commercial Banking Corporation as proof of remittance. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the Sworn Statement of Toyota-Philippines SGA General Manager Kazuki Miura. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, dividends paid to Toyota-Japan are subject to income tax at the rate of 30 percent, thus: "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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "Article 10 Dividends 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 the 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; cCSEaA 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 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 16 November 2004, Toyota-Japan owns 95% shares in Toyota-Philippines, which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividends paid by Toyota-Philippines to Toyota-Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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