ITAD BIR Ruling No. 110-16

June 22, 2016 ITAD BIR RULING NO. 110-16 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; IR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 International Elevator & Equipment, Inc. Km. 23 West Service Road South Superhighway, Cupang Muntinlupa City Attention: Mr. Ramoncito A. Ocampo President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 12, 2009 , requesting confirmation that the dividend payments by International Elevator & Equipment, Inc. ("International Elevator") to Mitsubishi Corporation ("MC") and Mitsubishi Electric Bldg. Techno Service Company Limited ("MELTEC") are subject to the 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") . It is represented that MC is a corporation organized and existing under the laws of Japan with principal address at 3-1, Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100-8086, Japan; that MELTEC is a corporation organized and existing under the laws of Japan with principal address at 1-7-1, Yurakucho Chiyoda-ku, Tokyo, Japan; that both MC and MELTEC are not registered either as corporations or as partnerships in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission for MC dated September 17, 2009, and for MELTEC dated September 22, 2009; and that, on the other hand, International Elevator is a corporation organized and existing under the laws of the Philippines with principal address at Km. 23 West Service Road, South Superhighway, Cupang, Muntinlupa City. It is further represented that as of August 6, 2006 up to the date of declaration of dividends, MC and MELTEC respectively hold 59,999,999 and 44,999,999 number of shares which respectively represent 20% and 15% of the voting shares of International Elevator ; that at the Special Meeting of the Board of Directors of International Elevator on July 22, 2009, it was resolved that the Board authorizes International Elevator to declare cash dividends of PhP200,000,000.00 payable out of the unrestricted retained earnings of International Elevator to all stockholders of record as of March 31, 2009, according to their respective holdings; that per Secretary's Certificate issued by International Elevator on April 27, 2011, said shareholdings of MC and MELTEC in International Elevator were acquired before six months immediately preceding the date of payments of the dividends; and that, based on a copy of bank's telegraphic transfer issued by Rizal Commercial Banking Corp.-Alabang B.C., such dividends were remitted to both MC and MELTEC on February 15, 2010. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per certification issued by International Elevator dated December 8, 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 received by a nonresident foreign corporation. It provides: CAIHTE "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 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%)." 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" Thus, Article 10 of the Philippines-Japan tax treaty as amended, which you invoke, may apply to the instant case. It provides: "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. 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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of 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; otherwise, said dividends may be taxed at a rate not exceeding 15 per cent of the gross amount in all other cases. In view thereof and considering that MC and MELTEC respectively hold directly 20 percent and 15 percent of the voting shares in International Elevator , for a period of six months immediately preceding the date of payment, said dividends paid by International Elevator to MC and MELTEC are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of the amended Philippines-Japan tax treaty. 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. DETACa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.