ITAD BIR Ruling No. 132-11

April 19, 2011 ITAD BIR RULING NO. 132-11 Article 10, Philippines-Japan tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD 7-10; BIR Ruling No. ITAD 8-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 35-10 Nonato & Nonato Law Offices Room 406 Tulips Center, A.S. Fortuna Street Bakilid, Mandaue City, Cebu Attention: Rester John L. Nonato Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application filed on December 15, 2010, on behalf of your clients, SENKO MEDICAL INSTRUMENT MANUFACTURING CO. LTD. ("SMI") and SENKO MEDICAL TRADING CO. LTD. ("SMT"), requesting confirmation that dividends to be paid by MERASENKO CORPORATION ("MC") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) 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"), as amended. Facts It is represented that SMI is a foreign corporation organized and existing under the laws of Japan and is a resident thereof per Residence Certificate dated November 29, 2010, signed by Masayuki Shirosawa, District Director of Hongo Tax Office and certified by Japan's Ministry of Foreign Affairs; that SMI is situated at 3-23-13 Hongo, Bunkyo-ku, Tokyo, 113-0033 Japan; that SMI's main line of business is the manufacture, repair, sales and lease of medical equipments, medical equipment for animals and pharmaceutical equipment; and that SMI is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 26, 2010. It is also represented that SMT is a foreign corporation organized and existing under the laws of Japan and is a resident thereof per Residence Certificate dated November 29, 2010, signed by Masayuki Shirosawa, District Director of Hongo Tax Office and certified by Japan's Ministry of Foreign Affairs; that SMT is situated at 3-23-13 Hongo, Bunkyo-ku, Tokyo, 113-0033 Japan; that SMT's main line of business is the sale, export and import of medical equipments that SMT is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration Company issued by the Securities and Exchange Commission dated November 26, 2010; and that, on the other hand, MC is a domestic corporation, registered with the Philippine Economic Zone Authority as an ecozone export enterprise and engaged in the manufacture and export of medical instruments, with principal office address at Mactan Economic Zone 2, Basak, Lapu-Lapu City, Cebu. cAIDEa It is further represented that SMI and SMT are holders of MC shares; that SMI holds 159,417 common shares with a value of P15,941,700.00, representing 33.31% of the capital stock of MC, during the period of six months prior to the date of payment of the dividends, while SMT holds 53,132 common shares with a value of P5,313,200.00, representing 11.10% of the capital stock of MC, during the period of six months prior to the date of payment of the dividends, per MC's Secretary's Certificate dated December 6, 2010; that at the special meeting of the Board of Directors of MC held on November 27, 2010, it was resolved that a cash dividend amounting to P2,284,000.00 be taken out of the unrestricted retained earnings as of September 30, 2009 and, be paid to all stockholders of record as of September 30, 2010; that the aforesaid cash dividends will be paid and remitted on December 20, 2010; and finally, that the dividends subject of the application for tax treaty relief are not under 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 Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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 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: cTIESD 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" In this particular case, the treaty involve is the Philippines-Japan tax treaty, as amended, which, in its Article 10, provides: "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. 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. cDIaAS xxx xxx xxx" It is provided under paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended, that dividends paid by a Philippine corporation to a resident of Japan may be taxed at a rate not exceeding 10 per cent of the gross amount of dividends if the recipient is a company which holds directly at least 10 per cent of the 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. In all other cases, the 15 percent preferential tax rate shall apply. In view of the foregoing, since SMI and SMT own more than 10 percent of the outstanding shares of MC, the paying corporation, during the period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends to be remitted by MC to SMI and SMT are subject to the preferential rate of 10 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010; BIR Ruling No. ITAD-008-10 dated June 3, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; and, BIR Ruling No. ITAD 35-10 dated September 14, 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