ITAD BIR Ruling No. 112-14

July 21, 2014 ITAD BIR RULING NO. 112-14 Article 10, Philippines-Japan tax treaty Hayakawa Electronics (Phils.) Corp. CEZ Drive, Cavite Economic Zone Rosario, Cavite, Philippines Attention: Mr. Mariano S. Ponce de Leon Treasurer Gentlemen : This refers to your application for tax treaty relief filed on November 19, 2013 requesting confirmation that dividends paid by Hayakawa Electronics (Phils.) Corp. ("Hayakawa Philippines") to Hayakawa Electric Wire Co., Ltd. 1 ("Hayakawa Electric") 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. 2 Facts Hayakawa Electric is a corporation organized and existing under the laws of Japan and is a resident thereof based on its Commercial Registry and Residence Certificate issued by the Himeji Tax Office in Japan on October 30, 2013. Hayakawa Electric is located at 422 Nishi-Nobusue, Himeji City, Hyogo Pref., Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on October 9, 2013, Hayakawa Electric is not registered as a corporation or partnership in the Philippines. On the other hand, Hayakawa Philippines is a domestic corporation situated at CEZ Drive, Cavite Economic Zone, Rosario, Cavite, Philippines. Based on the Secretary's Certificate issued on November 11, 2013, the Board of Directors of Hayakawa Philippines (during a special meeting on October 15, 2013) declared cash dividends amounting to 175,000,000.00 in favor of all the company's stockholders of record as of October 30, 2013, and payable on or before November 19, 2013. As of record date, Hayakawa Electric holds 100 percent of the total shares of stock of Hayakawa Philippines as described below: cHCaIE Stockholder Number and Value Mode of Acquisition Percentage of of Shares Acquisition Date Ownership Hayakawa Electric 74,995 By purchase Apr. 20, 1990 100 percent 55,658 By purchase Jan. 8, 1991 1 By purchase May 5, 19 92 242,088 By purchase June 6, 1992 402,769 By purchase Sep. 15, 1992 1 By purchase Aug. 2, 1993 22,933 By purchase Aug. 18, 1997 94,457 By purchase Jan. 27, 1998 3 By purchase Mar. 1, 2010 Total 892,905 (P89,290,500.00) Based on the Certification issued by Bank of Tokyo-Mitsubishi UFJ Manila Branch 3 on December 5, 2013, such dividends were remitted by Hayakawa Philippines to Hayakawa Electric as follows: Date of Remittance Reference Number Gross Amount Net Amount after Withholding Tax November 28, 2013 697TTS110594 175,000,000.00 157,500,000.00 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 Statement issued by the Treasurer of Hayakawa Philippines on October 2, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: SIcCTD "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" Moreover, 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%)." HADTEC 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, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "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; TcAECH b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 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." Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Based on the above-mentioned provisions, since Hayakawa Electric holds directly at least 10 percent of the total shares of Hayakawa Philippines during a period of six months immediately preceding the date of payment of the dividends on November 28, 2013, where Hayakawa Electric actually holds 100 percent of these shares since March 1, 2010 , such dividends paid by Hayakawa Philippines to Hayakawa Electric 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. THIASE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Formerly Hayakawa Densen Kogyo Co., Ltd. 2. 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. 3. Located at 15th Floor, Ayala Avenue, Makati City, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.