ITAD BIR Ruling No. 123-11

April 13, 2011 ITAD BIR RULING NO. 123-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Sumidenso Automotive Technologies Asia Corporation N2835 J. Abad Santos Avenue corner Bayanihan Street Clark Freeport Zone, Pampanga 2023 Philippines Attention: Kazuhiko Mori President Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on July 15, 2010 on the dividends paid by your company, SUMIDENSO AUTOMOTIVE TECHNOLOGIES ASIA CORPORATION ("SAT-A") to SUMITOMO WIRING SYSTEMS, LTD. ("SWS"), 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 its Protocol which took effect on January 1, 2009 ("Philippines-Japan tax treaty, as amended") . IHCESD It is represented that SWS, with address at 1-14 Nishisuehiro-cho, Yokkaichi, Mie, 510-8503, Japan, is a corporation duly organized and established under the laws of Japan, and is a resident of and subject to taxation in Japan, per Residence Certificate issued by the District Director of Yokkaichi Tax Office dated March 19, 2010; that SWS 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 Philippine Securities and Exchange Commission dated February 2, 2010; and that SAT-A, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with address located at N2835 J. Abad Santos Ave. cor. Bayanihan St. Clark Freeport Zone Pampanga 2023. It is further represented that during a special meeting of SAT-A's Board of Directors on April 7, 2010 , a resolution was unanimously approved and adopted authorizing the declaration of cash dividend in the amount of US$373,020.82 , which is 100% of the 2009 net income of SAT-A, in favor of its shareholders of record as of April 7, 2010, which shall be paid on or before July 31, 2010, per Secretary's Certificate issued by SAT-A dated April 7, 2010; that, moreover, at the special meeting of SAT-A's Board of Directors on May 29, 2010 , the Board declared a cash dividend amounting to US$224,691.27, equivalent to 100% of the January to March 2010 net income of SAT-A, which shall be shared by the shareholders in accordance with their capital interest in SAT-A to be paid out to the shareholders, on or before July 31, 2010, as shown in the Secretary's Certificate issued by SAT-A on May 29, 2010. Moreover, based on the Certifications issued by SAT-A's Corporate Secretary respectively dated November 22, 2010 and February 18, 2011, SWS has a total of 1,506,995 subscribed shares in SAT-A, with a par value of P100.00 per share, equivalent to the total amount of P150,699,500.00, and which is 99.9995% of SAT-A's shares, acquired as follows: No. of Shares Date Acquired Type of Shares 400,000 June 30, 1999 Common 400,000 February 17, 2000 Common 130,000 July 3, 2001 Common 577,000 October 5, 2001 Common 1,507,000 1 ======== It is finally represented that the transaction subject of the herein TTRA 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 certification executed by SAT-A on June 1, 2010. In reply, please be informed that dividends derived in the Philippines by a nonresident foreign corporation, as in the instant case SWS, is generally governed by Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides, viz. : "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%). TDcEaH xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, the said income may be exempt or, partially exempt from Philippine income tax. It provides, viz. : "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" In accordance with the foregoing, you now invoke Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. It provides, viz. : "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. 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. CIHAED xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter holds at least 10 percent either of the voting shares or of the total shares of the Philippine company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent preferential tax rate shall apply. In view thereof and considering that SWS holds 99.99% shares in SAT-A during the period of 6 months prior to July 31, 2010, the date of payment of the cash dividends separately declared on April 7, 2010 and May 29, 2010, this Office is of the opinion and so holds that the dividend payments of SAT-A to SWS are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-07-10 dated May 20, 2010; BIR Ruling No. ITAD-08-10 dated June 03, 2010; BIR Ruling No. ITAD-11-10 dated June 16, 2010; BIR Ruling No. ITAD-35-10 dated September 14, 2010) 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. Five (5) out of the 1,507,000 shares were held by individuals/nominee shareholders of SWS for them to qualify as directors of SAT-A, thus making SWS' total subscribed shares in SAT-A 1,506,995, per Certification issued by SAT-A on February 18, 2011.