ITAD BIR Ruling No. 135-11

April 29, 2011 ITAD BIR RULING NO. 135-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 060-10; BIR Ruling No. ITAD 057-10; BIR Ruling No. ITAD 059-10 Ichinomiya Electronics Philippine Corporation 128 East Main Ave., Special Economic Processing Zone, Laguna Technopark, Bian, Laguna 4024, Philippines Attention: Claire T. Coladilla Administration Manager Mesdames : This refers to your Tax Treaty Relief Application (TTRA) filed on March 10, 2011 on behalf of Ichinomiya Denki Co. Ltd. ("Ichinomiya Denki") requesting for a ruling that the dividend payments of Ichinomiya Electronics Philippines Corporation ("Ichinomiya Philippines") to Ichinomiya Denki are subject to the preferential withholding tax rate of 10 percent pursuant to Article 10 of the amended 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") . Basic Facts It is represented that Ichinomiya Denki is a nonresident foreign corporation organized and existing under the laws of Japan with principal office at 358 Uruka Ichinomiya-chou Shiso-shi, Hyogo Pref, Japan per its Company Register; that it is a fiscal resident in Japan for purposes of taxation as certified by the District Director of Tatsuno Tax Office on February 17, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated January 6, 2011; that, Ichinomiya Philippines , on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at 128 East Main Avenue, Laguna Technopark, Special Economic Processing Zone, Bian, Laguna, Philippines. It is further represented that on October 29, 2010 the Board of Directors of Ichinomiya Philippines approved a resolution declaring payment of cash dividends in the amount of One Hundred Twenty Million Pesos (PhP120,000,000.00) in favor of all stockholders of record as of October 29, 2010, payable on March 31, 2011; and that as per certification issued by the Corporate Secretary of Ichinomiya Philippines, Ichinomiya Denki holds 800,000 shares constituting 99% of the issued and outstanding shares of Ichinomiya Philippines since July 10, 2009. TacSAE It is finally represented that the issue or transaction subject of this request or 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 as per certification issued by the President of Ichinomiya Philippines dated February 11, 2011. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "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 interest, 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%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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." Hence, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: TIHDAa "Article 10 DIVIDENDS 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. xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a company which is a Philippine resident to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. In view thereof, and considering that Ichinomiya Denki holds 800,000 shares constituting 99%, which is more than 10 percent, of the issued and outstanding shares of Ichinomiya Philippines since July 10, 2009, or more than 6 months immediately preceding the date of payment of the dividends, this Office is of the opinion, and hereby holds, that the said dividends paid by Ichinomiya Philippines to Ichinomiya Denki are subject to 10 percent preferential tax rate prescribed under Article 10 of the Philippines-Japan tax treaty, as amended ( BIR Ruling No. ITAD 060-10 dated November 3, 2010; BIR Ruling No. ITAD 059-10 dated November 3, 2010; BIR Ruling No. 057-10 dated October 22, 2010 ). IASCTD This ruling is issued on the basis of the foregoing 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