ITAD BIR Ruling No. 128-11

April 19, 2011 ITAD BIR RULING NO. 128-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 7-10; BIR Ruling No. ITAD 7-11 Mitsubishi Corporation Manila Branch 14th Floor, L.V. Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Mr. Nobuya Ichiki General Manager Gentlemen : This refers to your letter dated July 24, 2010 requesting confirmation that dividends by AYALA CORPORATION ("AYALA") to MITSUBISHI LOGISTICS CORPORATION ("MITSUBISHI LOGISTICS") are subject to a preferential tax rate of 15 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 MITSUBISHI LOGISTICS is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on the Residence Certificate issued by the Nihonbashi Tax Office in Japan on June 23, 2010; that MITSUBISHI LOGISTICS is situated at 19-1, Nihonbashi 1-Chome, Chuo-Ku, Tokyo, Japan; that MITSUBISHI LOGISTICS is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on February 2, 2010; and that, on the other hand, AYALA is a domestic corporation situated at 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City, Philippines. It is further represented that on June 2, 2010, the Board of Directors of AYALA, at its regular meeting, unanimously passed and approved Resolution No. B-13-10 authorizing the declaration of regular cash dividends for the first semester of 2010 to all common shareholders of AYALA as of June 30, 2010, based on the Certificate issued by the Assistant Corporate Secretary of AYALA on June 25, 2010; that the dividends will be taken from the unappropriated retained earnings of AYALA as of December 31, 2009; that as of June 22, 2010, the total and outstanding common shares of stocks of AYALA registered in the name of MITSUBISHI LOGISTICS is 300,427, or equivalent to 0.06172 percent of the total and outstanding shares of AYALA, with a par value of P50.00 each, based on the Certificate issued by the same Assistant Corporate Secretary on July 14, 2010. HDIATS 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 Certification issued by the same Assistant Corporate Secretary on July 14, 2010. 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 MITSUBISHI LOGISTICS, 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 tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, 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" With respect to a tax treaty, what you invoke is the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: ASTDCH "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. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax dividends arising in the Philippines and paid to a resident of Japan at a rate not to exceed: (a) 10 percent of the gross amount of the dividends if the company recipient of the dividends directly holds 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 company paying the dividends is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since MITSUBISHI LOGISTICS does not hold directly at least 10 percent of the voting shares or total shares of AYALA, and since AYALA is not registered with the Board of Investments as such, such dividends to be paid by AYALA to MITSUBISHI LOGISTICS are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 7-11 dated January 19, 2011; BIR Ruling No. ITAD 7-10 dated May 20, 2010) CaSHAc 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.