ITAD BIR Ruling No. 118-14

July 21, 2014 ITAD BIR RULING NO. 118-14 Article 10 (Dividends), Philippines-Japan tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Fabian K. De los Santos Partner, Tax Services Gentlemen : This refers to your tax treaty application ("TTRA") filed on January 28, 2014, requesting confirmation that dividends paid by Taiheiyo Cement Philippines, Inc. ("TCPI") to Taiheiyo Cement Corporation ("TCC") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by the 2009 Protocol ("Philippines-Japan tax treaty"). It is represented that TCC is a foreign corporation organized and existing under the laws of Japan and is a resident thereof within the meaning of Article 4 of the Convention between the Philippines and Japan on the avoidance of double taxation with business address at Daiba Garden City, 2-3-5, Daiba, Minato-Ku, Tokyo, Japan; that it is not registered as a corporation or a partnership in the Philippines per SEC certification issued on January 29, 2013; and that on the other hand, TCPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address in South Poblacion, San Fernando, Cebu 6018. It is also represented that TCC is the registered owner of Seven Million (7,000,000) Redeemable Preferred Shares and Five Million Eight Hundred Three Thousand One Hundred Eighty-Seven (5,803,187) common shares plus Seven (7) shares of its nominees for a total of Twelve Million Eight Hundred Three Thousand One Hundred Eighty-Seven (12,803,187) shares constituting One Hundred percent (100%) of the issued and outstanding shares in TCPI as of January 22, 2014. The following are the details of the acquisition of shares of TCPI by TCC: CaEIST Date Issued Type of Share No. of Shares March 26, 2001 Common 3,567,730 May 2, 2003 Common 486,510 August 26, 2003 Common 1,007,250 August 6, 2003 Common 741,697 August 8, 2006 Redeemable 5,000,000 Preferred June 29, 2011 Redeemable 2,000,000 Preferred Total 12,803,187 ======== It is also represented that on December 25, 2013, the board of directors of TCPI has declared cash dividend of Php270,000,000.00 out of the corporation's Unrestricted Retained Earnings to be distributed to the stockholders of record as of the close of business hours of December 31, 2013; and that on January 30, 2014, the amount of USD Five Million Three Hundred Seventy-Two Thousand Nine Hundred Forty-One and 29/100 (USD5,372,941) n was paid to TCC by TCPI per notarized certification issued by on April 2, 2014. It is also represented, per sworn certification issued by the Chief Financial Officer of TCPI on January 17, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to TCC are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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, under Section 32 (B) (5) of the Tax Code, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." AETcSa For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 1, 2, & 3 of 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; b) 15 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. Under paragraphs 2 and 3 of 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 (a) 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 during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. cEHSIC Accordingly, the dividend paid by TCPI to TCC is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) TCC holds 12,803,187 common and redeemable preferred shares constituting 100 percent of the total shares of TCPI, which is more than ten percent (10%) of the capital of the said company ; and (2) TCC holds the said shares during the period of more than 6 months immediately preceding the date of payment of the dividends on January 30, 2014 or since June 29, 2011. 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 n Note from the Publisher: Copied verbatim from the official copy. Discrepancy between amount in words and in figures. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.