ITAD BIR Ruling No. 130-11

April 19, 2011 ITAD BIR RULING NO. 130-11 Article 10, Philippines-Japan tax treaty; Sections 28 (B) (1) and 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD 057-10; BIR Ruling No. DA ITAD 055-10; BIR Ruling No. ITAD 051-10; BIR Ruling No. ITAD 011-10; BIR Ruling No. ITAD 148-05 SIIX Philippines, Inc. Room 802, Sage House 110 Herrera Street, Legaspi Village Makati City Attention: Shigeo Kigawa Managing Director Gentlemen : This refers to your letter dated April 24, 2007 requesting confirmation that dividends paid by SIIX Philippines, Inc. ("SIIX Philippines") to SIIX Corporation ("SIIX") are subject to a preferential tax rate of 10 percent pursuant to Article 10 of 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") . It is represented that SIIX is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on the Certification issued by the Higoshi Tax Office in Japan on April 2, 2007; that SIIX is situated at 1-4-9, Bingo-machi, Chou-ku, Osaka 541-0051, Japan; that SIIX is not registered as a corporation or partnership in the Philippines per Certification issued by the Securities and Exchange Commission on March 19, 2007; and that, on the other hand, SIIX Philippines is a domestic corporation situated at Room 802, Sage House, 110 Herrera Street, Legaspi Village, Makati City, Philippines. It is further represented that that on March 23, 2007, the Board of Directors of SIIX Philippines, at its special meeting, declared cash dividends in favor of the stockholders of SIIX Philippines amounting to Fifty One Pesos and Seventy Cents (PhP51.70) per share, based on the Certificate issued by the Corporate Secretary of SIIX Philippines on March 23, 2007; that the dividends are payable on April 27, 2007, and will be taken out of the retained earnings of SIIX Philippines; and that, as of January 1, 2006, to present, SIIX owns One Hundred Forty-Six Thousand Nine Hundred Ninety-Five (146,995) shares of stock of SIIX Philippines, with a par value of PhP100.00 per share, and which represent 99.99 percent of the total shares of SIIX Philippines, based on the Certification issued by the Corporate Secretary on April 26, 2007. It is finally represented that the issue or transaction subject of the request for ruling is 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 Certification issued by the Managing Director of SIIX Philippines on April 27, 2007. AHCcET 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 derived by SIIX, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 35 percent, before January 1, 2009, and 30 percent, beginning January 1, 2009, and thereafter, 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 same Code provides that such dividends may be exempt 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 treaty, what you invoke is the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3 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: DAHEaT 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 (emphasis supplied)" 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 25 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 to by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines; and (c) 25 percent in all other cases. This being the case, and considering that SIIX holds 99.99% percent of the total shares of stock of SIIX Philippines for a period of at least six months immediately preceding the date of payment of the dividends on April 27, 2007 (in fact, since January 1, 2006), this Office is of the opinion and so holds that the dividends paid by SIIX Philippines to SIIX are subject to a preferential tax 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 057-10 dated October 22, 2010; BIR Ruling No. DA ITAD 055-10 dated October 22, 2010; BIR Ruling No. ITAD 051-10 dated October 13, 2010; BIR Ruling No. ITAD 011-10 dated June 16, 2010; BIR Ruling No. ITAD 148-05 dated November 29, 2005). 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. aEcTDI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue