ITAD BIR Ruling No. 113-11

April 11, 2011 ITAD BIR RULING NO. 113-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-007-10 Nonato & Nonato Law Offices Rm 406 Tulips Center, A.S. Fortuna Street Bakilid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Atty. Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application filed on March 30, 2010 and May 7, 2010, requesting confirmation that the cash dividends declared on December 2, 2009 and April 19, 2010 by Yamashin Cebu Filter Manufacturing Corporation ("Yamashin-Phil") in favor of Yamashin Filter Corporation ("Yamashin-Japan") are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 of 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") . 1 DHECac It is represented that Yamashin-Japan is a resident of, and a corporation organized and existing under the laws of Japan, with principal address at 15th Floor Nisseki-Yokohama Building, 1-1-8 Sakuragi-Cho, Naka-Ku Yokohama Kanagawa Japan, per Certificate of Residence issued by Naoto Yamagihara, District Director of Yokonamahaka Tax Office on May 8, 2009; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 12, 2010; and that, on the other hand, Yamashin-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Mepz II, Basak, Mactan, Lapulapu City. It is further represented that on December 2, 2009, at the special meeting of the Board of Directors of Yamashin-Phil, a cash dividend of J50,000,000.00, to be taken out of the accumulated unrestricted earnings or surplus profit of Yamashin-Phil as of fiscal year ended March 31, 2009, was declared in favor of the stockholders of record of Yamashin-Phil as of December 2, 2009, to be paid on March 30, 2010; that, moreover, on April 19, 2010, the Board of Directors of Yamashin-Phil declared an additional cash dividend in the amount of J40,000,000.00 to be taken out of the accumulated unrestricted retained earnings or surplus profits of Yamashin-Phil as of fiscal year ended March 31, 2009, in favor of stockholders of record of Yamashin-Phil as of April 19, 2010, payable on installments within the fiscal year ending March 31, 2011; that per the March 26 and May 7, 2010 secretary's certificates issued by Yamashin-Phil, Yamashin-Japan holds 99.999% shareholdings in Yamashin-Phil six (6) months prior to the dates of the payments of the said dividends; and that per sworn certifications issued by Yamashin-Phil dated March 26, 2010 and May 7, 2010, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. 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 derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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): 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. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: aSCHIT "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. 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount in all other cases. In view thereof and considering that Yamashin-Japan holds directly 99.999% of the shareholdings of Yamashin-Phil or more than the required minimum shareholdings of 10 percent, for a period of 6 months immediately preceding the dates of payment, said dividends paid by Yamashin-Phil to Yamashin-Japan are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol amending Philippines-Japan tax treaty became effective on January 1, 2009.