ITAD BIR Ruling No. 114-15

April 30, 2015 ITAD BIR RULING NO. 114-15 Article 10, Philippines-Japan tax treaty, as amended MAXIMA Machineries Incorporated 871 Quezon Avenue, Brgy. Sta. Cruz Quezon City Attention: Yusaku Nemoto Executive Vice President Gentlemen : This refers to your tax treaty relief application filed on November 4, 2011, requesting confirmation that dividends to be received by Marubeni Corporation ("Marubeni-Japan") from MAXIMA Machineries Incorporated ("MAXIMA") are subject to preferential tax rate of 10 percent pursuant to Article 10 (2) (a) 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") . It is represented that Marubeni-Japan , with address at 4-2 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, 100-8088 Japan, is a resident of Japan for the purpose of the Philippines-Japan tax treaty as certified by the District Director of Kojimachi Tax Office on December 16, 2011; that it is a corporation organized and existing under the laws of Japan based on its Articles of Incorporation; that it was licensed to engage in business in the Philippines per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated December 9, 2011; that per Certification issued by Marubeni-Philippine Branch dated December 5, 2011, Marubeni-Philippine Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office of shares in MAXIMA, and that the income derived by Marubeni-Japan from its investment in MAXIMA is neither attributable to Marubeni-Philippine Branch nor paid or coursed through the latter, since any dividend income derived from the said investment is directly recorded in the books of Marubeni-Japan ; that such income which is derived by Marubeni-Japan from its investment in MAXIMA is neither connected with, nor resulting from the ordinary course of trade or business of Marubeni-Philippine Branch , and that the investment of Marubeni-Japan in MAXIMA or the dividends derived therefrom are neither used nor held for use in the conduct of trade or business of Marubeni-Philippine Branch . It is further represented, that at the Annual Stockholders Meeting held on November 3, 2011, the Board of Directors of MAXIMA approved the declaration of dividends amounting to Php1,184,728,929.58, for the years 2010 and as of September 2011, payable on November 8, 2011; that based on the November 4, 2011 Secretary's Certificate issued by MAXIMA, as of May 25, 2007, Marubeni-Japan has a shareholding of 3,200,00 with a par value of Php100.00 per share in MAXIMA representing 40 percent ownership of the authorized capital stock of MAXIMA. It is finally represented that the 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 Secretary's Certificate issued by MAXIMA dated November 4, 2011. 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 income 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 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 . 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." The provisions of 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. 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." Relative thereto, it was held by the Supreme Court in Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, considering the representation that Marubeni-Philippine Branch has neither investments nor any shares of stock in MAXIMA; that Marubeni-Philippine Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office, Marubeni-Japan , of shares in MAXIMA; that the said income is not paid or coursed through Marubeni-Philippine Branch ; that any dividend income derived from the said investment is directly recorded in the books of Marubeni-Japan ; and that Marubeni-Philippine Branch neither uses nor holds for use in the conduct of its trade or business any shares of stock of Marubeni-Japan in MAXIMA, then the subject dividend income of Marubeni-Japan cannot therefore be said to be attributable to Marubeni-Philippine Branch . In view thereof and considering that Marubeni-Japan is a resident corporation in Japan, which holds more than 10 percent of the authorized capital stock in MAXIMA for a period of 6 months immediately preceding the date of payment of the dividends or since May 25, 2007, said dividends paid by MAXIMA to Marubeni-Japan are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. 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