ITAD BIR Ruling No. 121-13

April 24, 2013 ITAD BIR RULING NO. 121-13 Article 10 (2) (a), Philippines-Japan Tax Treaty, as amended JFE Shoji Trade Philippines, Inc. 17/F 6788 Ayala cor. Oledan Square Makati City Attention: Mr. Takeo Inque President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 6, 2012, on behalf of JFE Shoji Trade Corporation ("JFE Japan") , requesting confirmation that dividend payment made by JFE Shoji Trade Philippines, Inc. ("JFE Phils") to JFE Japan is subject to the 10 percent preferential tax 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 ("Philippines-Japan tax treaty, as amended") . It is represented that JFE Japan , with address at 1-6-20 Doujima, Kita-ku, Osaka Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the District Director of Kita Tax Office on September 7, 2012; that JFE Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated June 21, 2012; and that JFE Phils , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 17/F 6788 Ayala corner Oledan Square, Makati City. It is also represented, per Secretary's Certificate dated June 15, 2012, that as of April 27, 2012, JFE Japan owns 211,835 shares with a total par value of Php100.00 or an aggregate par value of Php21,183,500, constituting 99.97% of the outstanding capital stock of JFE Phils ; and that these shares were acquired by JFE Japan through direct subscription and payment in cash on August 7, 1995 and December 14, 1999. It is further represented that at its special meeting on April 27, 2012, the Board of Directors of JFE Phils approved the declaration of cash dividend for a total amount of Ten Million Eight Hundred Fifty-Three Thousand Pesos (Php10,853,000.00) out of the unrestricted retained earnings of JFE Phils as of December 31, 2011 to stockholders of record as of March 27, 2012; that the said dividend was remitted to JFE Japan on June 29, 2012 as evidenced by the Statement of Account and Advice of Debit (Outgoing Foreign Remittance) of the Bank of Tokyo-Mitsubishi UFJ-Manila Branch dated June 29, 2012. Finally, it is represented that the transaction subject of the herein request for ruling is not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per the Sworn Statement issued by JFE Phils dated June 14, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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. 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 . . . dividends, rents, royalties . . . : Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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. xxx xxx xxx" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked 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. 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. 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. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State." Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. This being the case, inasmuch as JFE Japan holds directly 99.97% of the outstanding capital stock of JFE Phils (which in fact exceeds the minimum required percentage of holding of 10 percent), and since JFE Japan maintains such holdings since December 14, 1999, and, in effect, more than six months immediately preceding the date of payment of the dividend, said dividend paid by JFE Phils to JFE Japan is subject to income tax at the rate of 10 percent of the gross amount thereof, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue