ITAD BIR Ruling No. 121-16

June 29, 2016 ITAD BIR RULING NO. 121-16 Article 10, Philippines-Japan tax treaty TS Tech Trim Philippines, Inc. 102 Tecnnology Ave., Laguna Technopark SEPZ, Bian, Laguna Attention: Reden D. Almira Senior Manager Finance and Accounting/MIS Gentlemen : This refers to your tax treaty relief application filed on July 9, 2013, requesting confirmation that dividends received by TS TECH CO., LTD. ("TS TECH Japan") from TS TECH TRIM PHILIPPINES, INC. ("TS TECH Phils") are subject to income tax of 10 percent 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 1 ("Philippines-Japan tax treaty") . Facts It is represented that TS TECH Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Asaka Tax Office of Japan on June 11, 2013; that TS TECH Japan is situated at 3-7-27, Sakae-cho, Asaka-shi, Saitama, Japan; that TS TECH Japan is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 7, 2013; and that, on the other hand, TS TECH Phils is a domestic corporation situated at 102 East Main Avenue, Laguna Technopark, Special Export Zone, Bian, Laguna, Philippines. It is further represented that on April 26, 2013, the Board of Directors of TS TECH Phils declare cash dividend amounting to Fifty Million Pesos (P50,000,000.00), out of its retained earnings as of December 31, 2012 to all stockholders of record as of December 31, 2012, in proportion to their respective stockholdings as of such date, payable on or before May 31, 2013; that TS TECH Japan owns 124,995 common shares of stock with a par value of P1,000.00 per shares equivalent to approximately 99.99% of the total outstanding shares of TS TECH Phils since January 30, 1996. It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Affidavit issued by TS TECH Phils dated May 24, 2013. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to TS TECH Japan , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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): 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 Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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" For this purpose, you invoke the Philippines-Japan tax treaty, as amended, provides as follows: "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." 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 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 thereof. Accordingly, considering that TS TECH Japan holds 124,995 common shares of stock of TS TECH Phils equivalent to 99.99 percent total outstanding shares, during the period of six months immediately preceding the date of payment of the dividends or since January 30, 1996, such dividends paid by TS TECH Phils to TS TECH Japan are subject to income tax at the reduced rate of 10 percent of the gross amount thereof , pursuant to paragraph 2 (a), Article 10 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.