ITAD BIR Ruling No. 126-12

March 21, 2012 ITAD BIR RULING NO. 126-12 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-096-11 Merasenko Corporation Mactan Economic Zone 2 Basak, Lapu-lapu, Cebu City Attention: Atty. Rester John L. Nonato Legal Counsel Gentlemen : This refers to your tax treaty relief application filed on December 12, 2011 requesting for confirmation that dividends paid by Merasenko Corporation ("Merasenko PH") to Senko Medical Trading Co. Ltd. ("Senko Japan") 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Senko Japan is a foreign corporation organized and existing under the laws of Japan with its principal office address at 3-23-13 Hongo, Bunkyo-ku, Tokyo, 113-0033 Japan based on the Certification issued by the District Director of Hongo Tax Office in Tokyo, Japan on November 15, 2011; that Senko Japan is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on November 29, 2011; and that on the other hand, Merasenko PH is a domestic corporation situated at the Mactan Economic Zone 2, Basak, Lapu-lapu City, Cebu. It is further represented that during the Special Meeting of the Board of Directors of Merasenko PH held on November 17, 2011, Merasenko PH declared cash dividends in the amount of PhP4,263,000.00 in favor of its shareholders of record as of September 30, 2011 based on the Certificate issued by the Corporate Secretary of Merasenko PH on November 17, 2011; that the said dividends has been paid and remitted to Senko Japan on December 14, 2011 based on the Certificate issued by the Corporate Secretary of Merasenko PH on January 18, 2012; that Senko Japan owns 53,132 shares of stock constituting 11.10% in Merasenko PH with value of PhP5,313,200.00 as of date of declaration and date of payment of the dividends; that the said shares of stock owned by Senko Japan in Merasenko PH were acquired by subscription on November 17, 1995 based on the Certificate issued by the Corporate Secretary of Merasenko PH on November 17, 2011. AHDTIE It is finally represented that the dividends subject of this ruling 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 Sworn Statement issued by the same Corporate Secretary of Merasenko PH on November 17, 2011. 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 Senko Japan, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 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 . . ., dividends, . . .: 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. DHCSTa xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty, as amended by the Protocol. 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; 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" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) 10 percent 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 for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. aCTADI This being the case, and considering that Senko Japan holds more than 10 percent (in fact it holds 11.10 percent) of the total shares of Merasenko PH during a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that such dividends paid by Merasenko PH to Senko Japan are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD-096-11 dated March 15, 2011). 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 effective January 1, 2009.