ITAD BIR Ruling No. 124-13

April 26, 2013 ITAD BIR RULING NO. 124-13 Article 10, Philippines-Japan tax treaty Sycip Gorres Velayo & Company 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Principal Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on March 23, 2012 , on behalf of, Sojitz Corporation ("Sojitz") , requesting confirmation that the dividend payments of All Asian Countertrade, Inc. ("AACI") to Sojitz are subject to the preferential tax rate of 15 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . aESTAI Facts It is represented that Sojitz is a corporation duly organized and existing under the laws of Japan and is a resident thereof for tax purposes, with office address at 1-20, Akasaka 6-Chome Minato-ku, Tokyo 107-8655, Japan, per Certificate of Residence issued by the Azabu Tax Office of Japan; that it is registered to do business through a Philippine Branch ("Sojitz Philippine Branch") per Certificate of Corporate Filing/Information dated 7 March, 2012. The branch's principal place of business is at 24/F Pacific Star Building, Makati Ave. cor. Sen. Gil Puyat Ave., Makati City, Philippines; and that on the other hand, AACI is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office and principal place of business at National Life Building, 6762 Ayala Ave., Makati City 1226, engaged in the sugar trading business. On March 7, 2012 as shown in the Secretary's Certificate issued by the Corporate Secretary, during the special meeting of the Board of Directors of AACI, a resolution was unanimously approved declaring cash dividends in the amount of forty million pesos (Php40,000,000.00), payable not later than March 31, 2012 in favor of AACI shareholders of record as of February 29, 2012; that Sojitz is the registered/legal and beneficial owner of 168,077 shares in AACI, representing five and 24/100 percent (5.24%) share ownership of AACI total shares. It is further represented per notarized certification issued by General Manager of Sojitz Corporation-Philippine Branch that the branch office is not a material factor in the realization of dividends paid by AACI to the head office in Japan, and such dividends were not realized in the ordinary course of trade or business of the branch office and that the subject AACI shares held by Sojitz were not used in, or held for use in, the conduct of trade or business of the branch office of Sojitz Corporation; and that the dividend income was remitted to AACI by Sojitz last March 30, 2012, based on the notarized bank remittance issued by Chinabank dated May 8, 2012. It is finally represented, per Certification dated February 10, 2012 issued by AACI, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident foreign corporation. It provides: EIDaAH "Section 28. Rates of Income Tax on Foreign Corporations . (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 interest, 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%)." 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." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: EASCDH "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 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 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. xxx xxx xxx" 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. DACTSa In the instant case, considering that Sojitz holds less than 10 percent of the total outstanding capital stock of AACI this Office is of the opinion and so holds that the cash dividends paid by AACI to Sojitz shall be subject to the preferential tax rate of 15 percent based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-056-11 dated February 22, 2011) Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents , (G.R. No. 76573 dated September 14, 1989), it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, the profits of a corporation which is a resident of Japan are taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by AACI to Sojitz shall be considered as income of Sojitz as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). This ruling is issued on the basis of the foregoing 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. SEcADa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue