ITAD BIR Ruling No. 133-13

May 9, 2013 ITAD BIR RULING NO. 133-13 Article 10, Philippines-Japan tax treaty Sun Logistics Technology, Inc. Sitio Aratan, Pulong, Sta. Cruz Sta. Rosa, Laguna Philippines Attention: Jeanette F. Pingol Assistant Accounting Manager Gentlemen : This refers to your Tax Treaty Relief Application dated April 2, 2012, on behalf of San - Ei Industry Company, Ltd. ("SEI") ,requesting confirmation of your opinion that dividends received by SEI from Sun Logistics Technology, Inc. ("SLTI") are subject to the 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 ("Philippines-Japan tax treaty"), as amended. 1 Facts It is represented that SEI, with address at 10 Higashiura, Takaoka-cho Toyota-shi, Aichi, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Certificate of Domicile issued by the District Director of Toyota Tax Office dated March 5, 2012; that SEI is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 30, 2012; and that, on the other hand, SLTI is a corporation organized and existing under the laws of the Philippines, registered with the Board of Investments (BOI) under Registration No. EP 96-378 dated January 30, 1997 as Pioneer Service Exporter in the Field of Packaging of Commodities for Export with Custom Made Packaging Materials for Automotive Parts and Components, with principal address at Sitio Arajan, Pulong Sta. Cruz, Sta. Rosa, Laguna. It is further represented that, per the Certification issued by the Corporate Secretary of SLTI on March 30, 2012, that since August 18, 2009, SEI owns Seven Hundred Twenty Thousand (720,000) shares of stock with a total par value of Seventy-Two Million Pesos (P72,000,000.00),or 60% of the entire stockholdings of SLTI; that during the organizational meeting of the Board of Directors of SLTI on March 22, 2012, a resolution was unanimously passed and approved declaring a cash dividend in the total amount of Fifteen Million Pesos (P15,000,000.00) to be distributed in favor of all stockholders of record in proportion to their respective current equity holdings in SLTI; and that the said cash dividend shall be paid to the respective stockholders not later than May 31, 2012; and that based on the notarized certification dated September 12, 2012, issued by Rizal Commercial Banking Corporation, the dividend was remitted to SEI by SLTI on May 23, 2012. SECHIA It is finally represented, per Certification dated April 2, 2012 issued by SLTI, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to SEI are subject to income tax at the rate of 30 percent, thus: "SEC. 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, 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: "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: 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." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: ICTDEa "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 percent 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. ICcaST 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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 25 percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 25 percent of the gross amount thereof. In the instant case, considering that SEI holds 720,000 common shares, which represent 60% of SLTI total outstanding shares since August 18, 2009 or more than six months immediately preceding the date of payment, this Office is of the opinion and so holds that the cash dividends paid by SLTI to SEI shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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 .