ITAD BIR Ruling No. 124-12

March 20, 2012 ITAD BIR RULING NO. 124-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-008-10 International Wiring Systems (Phils.) Corporation Luisita Industrial Park Special Export Processing Zone San Miguel, Tarlac City Attention: Mr. Robert S. Balatbat Accounting Manager Gentlemen : This refers to your tax treaty relief application filed on July 29, 2011, requesting confirmation that dividends paid to Sumitomo Wiring Systems, Ltd. ("Sumitomo") and Siix Corporation ("Siix") by International Wiring Systems (Philippines) Corporation ("International Wiring") are subject to a preferential tax rate of 10 percent 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 by a Protocol 1 effective January 1, 2009. It is represented that Sumitomo and Siix are foreign corporations organized and existing under the laws of Japan and are residents thereof based on the Certificates of Residence issued respectively by Yokkaichi Tax Office and Higashi Tax Office on September 14, 2011 and September 8, 2011; that Sumitomo and Siix are, respectively, situated at 1-14 Nishisuehiro-cho, Yokkaichi, Mie 510-8503 and at 1-4-9, Bingo-machi, Chuo-ku, Osaka 541-0051, both in Japan; that Sumitomo and Siix are not registered as corporations or partnerships in the Philippines based on the Certifications of Non-Registration of Company both issued by Securities and Exchange Commission ("SEC") on September 22, 2011; and that, on the other hand, International Wiring is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 93-04 dated January 15, 1993 and is situated at Luisita Industrial Park Special Export Processing Zone, San Miguel, Tarlac City, Philippines. TDEASC It is further represented that on July 8, 2011, the Board of Directors of International Wiring , at its meeting, declared cash dividends amounting to US$933,507.44 for the fiscal year of 2010, in favor of its stockholders of record, payable on August 31, 2011; that Sumitomo and Siix are respectively, the legal and beneficial owners of 37,416,000 and 4,677,000 common shares constituting 80 percent and 10 percent of the entire stockholdings of International Wiring, which were respectively acquired on various dates from 1991 to 2008. 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 Sumitomo and Siix , being foreign corporations 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%). CSHcDT 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" With respect to a tax treaty, you invoke the Philippines-Japan tax treaty, as amended. 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 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; IcEACH 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. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines paid to residents of Japan may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends 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 of the gross amount of the dividends if the domestic company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that both Sumitomo and Siix hold directly at least 10 percent of the total shares of stock of International Wiring during the period of six months immediately preceding the date of payment of the dividends which is not later than August 31, 2011, such dividends paid by International Wiring to Sumitomo and Siix 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, as amended. ( BIR Ruling No. ITAD 008-10 dated June 3, 2010 ) CHATcE 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.