ITAD BIR Ruling No. 115-16

June 27, 2016 ITAD BIR RULING NO. 115-16 Article 10, Philippines-Japan tax treaty First Sumiden Realty, Inc. Ampere Street corner Main Avenue LISPP Bo. Diezmo, Cabuyao, Laguna Attention: Ms. Liz M. Fernandez Gentlemen : This refers to your application for tax treaty relief filed on November 15, 2013, requesting confirmation that the dividend payments made by FIRST SUMIDEN REALTY, INC. ("First Sumiden") to SUMITOMO ELECTRIC INDUSTRIES, INC. ("Sumitomo Electric") are subject to the preferential rate 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty") . It is represented that Sumitomo Electric is a foreign corporation organized and existing under the laws of Japan based on its Articles of Incorporation, as amended; that Sumitomo Electric is situated at 4-5-33, Kitahama, Chuo-ku, Osaka, 541-0041, Japan, based on the Residence Certificate issued by the District Director of Higashi Tax Office in Japan on October 11, 2013; that Sumitomo Electric has been licensed to establish its representative office in the Philippines but that a Certificate of Withdrawal of License of a Foreign Corporation was issued on October 27, 2010 based on the Certificate issued by the Securities and Exchange Commission on December 11, 2012; and that, on the other hand, First Sumiden is a domestic corporation situated at Ampere Street corner Main Avenue, Light Industry and Science Park, Barrio Diezmo, Cabuyao, Laguna, Philippines. It is also represented that during a regular meeting by the Board of Directors of First Sumiden on September 24, 2013, the Board approved the declaration and payment of cash dividends amounting to USD337,000.00 to its stockholders; that as of the date of declaration and of payment of the dividends, and since April 12, 1996, Sumitomo Electric holds 139,998 common shares of stock of First Sumiden with a par value of PHP100.00 each share, or equivalent to 40 percent ownership in First Sumiden based on the Certificate of the Corporate Secretary of First Sumiden issued on November 6, 2013. It is finally represented based on the notarized certification by the President of First Sumiden dated November 15, 2013, that the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that a foreign corporation like Sumitomo Electric , whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: EcTCAD "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: (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, what is invoked for this purpose is the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, 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 25 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) 25 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. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. xxx xxx xxx" Under paragraphs 2 and 3, Article 10 of the Philippines-Japan tax treaty, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 percent 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) 10 percent of the gross amount of the dividends if the dividends are paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 25 percent in all other cases. HSAcaE Accordingly, inasmuch as Sumitomo Electric holds directly at least 25 percent of the total common shares of stock of First Sumiden during the period of six months immediately preceding the date of payment of the dividends declared by First Sumiden , in fact, Sumitomo Electric holds 40 percent in First Sumiden since April 12, 1996, such dividends paid by First Sumiden to Sumitomo Electric are subject to income tax at the rate of 10 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. 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 Footnotes 1. 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.