ITAD BIR Ruling No. 129-11

April 19, 2011 ITAD BIR RULING NO. 129-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD No. 59-10 Sohbi Kohgei (Philippines), Inc. Special Economic Zone, LIMA Technology Center Lipa City, Batangas Attention: Mr. Toshiya Katakami Executive Vice President Gentlemen : This refers to your letter dated September 1, 2009 1 requesting confirmation that dividends to be paid by Sohbi Kohgei (Philippines), Inc. (Sohbi Kohgei Philippines) to Sohbi Kohgei Company, Ltd. (Sohbi Kohgei Company) and Hanwa Company, Ltd. (Hanwa) are subject to income tax in the Philippines at a rate not to exceed 10 percent based on the gross amount thereof 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) . 2 Basic Facts It is represented that Sohbi Kohgei Company and Hanwa are foreign corporations organized and existing under the laws of Japan based on their respective Articles of Incorporation; that Sohbi Kohgei Company is situated at 36, 1-Chome, Takefuchi-Nishi, Yao City, Osaka, Japan, and Hanwa at Hanwa Building, 4-3-9, Fushimi-Machi, Chuo-ku, Osaka, Japan; that Sohbi Kohgei Company is engaged primarily in (a) the design, production, and sale of metal parts for office and household appliances, (b) the production and sale of various marks, designs, and containers made of metal for decoration, and (c) in the dispatch of its workers pursuant to the Worker Dispatch Business Law; that Hanwa is engaged primarily in the wholesale trade, commissioning, importation, and exportation of (a) ordinary iron and steel materials, including steel bars, steel shapes, steel plates and sheets, wire rods and wire products, rails, steel pipes and tubes and the like, secondary and tertiary iron and steel products, especially steels and forged iron and steel products, (b) primary and secondary steel-making materials including pig iron, semi-finished iron and steel products, rerolling materials, iron and steel scraps, alloy iron, ores and coal, and (c) ingots of copper, lead zinc, aluminum, nickel, chrome, rare metals and the like, alloys and products made therefrom and their by-products, among others; that Sohbi Kohgei Company and Hanwa are not registered as corporations or as partnerships in the Philippines based on the Certifications of Non-Registration issued by the Securities and Exchange Commission dated November 18 and 12, 2009, respectively; that, on the other hand, Sohbi Kohgei Philippines is a domestic corporation situated at the Special Economic Zone, LIMA Technology Center Lipa City, Batangas Philippines; and that Sohbi Kohgei Philippines is registered with the Philippine Economic Zone Authority as an ecozone export enterprise under Certificate of Registration No. 99-050 dated August 12, 1999. IHSTDE It is also represented based on the notarized Certificates by the Corporate Secretary of Sohbi Kohgei Philippines , Mr. Enrico Pedro M. Ingles, dated August 14 and November 6, 2009 that 1. As of December 31, 2008, and since 2005, Sohbi Kohgei Company and Hanwa own, respectively, almost 75 percent and 25 percent of the outstanding shares of stock of Sohbi Kohgei Philippines . That this is equivalent to 2,521,722 shares for Sohbi Kohgei Company and 840,573 shares for Hanwa , each with a par value of PHP100.00, or PHP252,172,200.00 and PHP84,057,300, respectively. 2. On July 31, 2009, the Board of Directors of Sohbi Kohgei Philippines unanimously approved a resolution declaring cash dividends amounting to PHP10.00 per share in favor of the stockholders on record of Sohbi Kohgei Philippines as of December 31, 2008, payable on or before September 7, 2009. It is finally represented based on the notarized Certification by the Executive Vice President of Sohbi Kohgei Philippines , Mr. Toshiya Katakami, dated February 4, 2010, that the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling In reply, please be informed that foreign corporations like Sohbi Kohgei Company and Hanwa , whether or not engaged in trade or business in the Philippines, are subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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: ISDHcT (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is being invoked for this purpose is the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof provide as follows: "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 25 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) 25 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" The 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 (Amending Protocol) , signed on December 9, 2006, and effective January 1, 2009, amended Article 10 of the existing Philippines-Japan tax treaty as follows: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: ETHIDa '(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.'" Under paragraphs 2 and 3, Article 10 of the Philippines-Japan tax treaty, as amended, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 percent (in the case of dividends paid or received before January 1, 2009) or 10 percent (in the case of dividends paid or received on January 1, 2009, and thereafter) 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) 10 percent of the gross amount of the dividends if the dividends are 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; and (c) 25 percent (in the case of dividends paid or received before January 1, 2009) or 15 percent (in the case of dividends paid or received on January 1, 2009, and thereafter) in all other cases. Accordingly, with respect to cash dividends declared by Sohbi Kohgei on July 31, 2009, amounting to PHP10.00 per share and payable on or before September 7, 2009, such dividends paid to Sohbi Kohgei Company and Hanwa shall be subject to income tax in the Philippines at the rate of 10 percent based on the gross amount, pursuant to paragraph 2, Article 10 of the Philippines-Japan tax treaty, as amended. The lower rate applies since Sohbi Kohgei Company and Hanwa have been holding at least 10 percent of the total shares of stock of Sohbi Kohgei Philippines during the period of six months immediately preceding the date of payment of the dividends on or before September 7, 2009. (ITAD BIR Ruling No. 59-10 dated November 3, 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. Received by the International Tax Affairs Division of this Bureau on January 26, 2010. 2. Signed on February 13, 1980, and effective January 1, 1981.