ITAD BIR Ruling No. 137-14

July 22, 2014 ITAD BIR RULING NO. 137-14 Article 10 (3), Philippines-Japan Tax Treaty, as amended Elematec Philippines, Inc. 103 Technology Avenue Laguna Technopark SEPZ, Bian, Laguna Attention: Mr. Fumihiko Yokoyama President Gentlemen : This refers to your tax treaty relief application filed on March 27, 2013, on behalf of Elematec Corporation ("Elematec Japan") , requesting confirmation that dividend payment made by Elematec Philippines, Inc. ("Elematec Phils") to Elematec Japan is subject to the 10 percent preferential tax rate pursuant to 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"). It is represented that Elematec Japan , with address at 3-5-27 Mita, Minato-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the District Director of Shiba Tax Office on May 31, 2013; that Elematec Japan is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 22, 2013; that Elematec Phil , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 103 Technology Avenue, SEPZ, Bian, Laguna; and that it is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 04-04-L dated March 24, 2004. IDaCcS It is further represented, that per Secretary's Certificate issued by Elematec Phil , that as of March 28, 2013, Elematec Japan has 9,995 (99.95%) common shares valued at Nine Million Nine Hundred Ninety-Five Thousand Pesos (Php9,995,000.00) which were acquired by Elematec Japan on February 23, 2004 and paid in cash; that per Secretary's Certificate issued by Elematec Phil , at its Special Stockholders' Meeting on March 28, 2013, the Board of Directors of Elematec Phil approved Resolution No. 01-2013 declaring summary of cash dividends for the following: Stockholder No. of Shares Dividends in YPY Elematec Corporation 9,995 100,000,000.00 Fumihiko Yokoyama 1 10,005.00 Motoki Inoue 1 10,005.00 Yutaka Nishimiya 1 10,005.00 Hidenori Mizokami 1 10,005.00 Jesus Clint Aranas 1 10,005.00 Total 10,000 100,050,025.00 ====== =========== and that the said dividend was paid to Elematec Japan on June 26, 2013 as evidenced by notarized sworn certification from the Mizuho Bank Ltd. dated July 9, 2013. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by Elematec Phil dated July 5, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). ECaHSI 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: 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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke may apply to the instant case. It 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: DEacIT 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. HDaACI "xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident in Japan at a rate not exceeding 10 percent of the gross amount of dividends if the latter holds at least 10 percent either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent preferential tax rate on gross dividends shall apply. In view of the foregoing, and since Elematec Japan is a holder of more than 10 percent of the capital stock of Elematec Phil , i.e. , 99.95% from February 23, 2004 up to the date of declaration of dividends (March 28, 2013) as evidenced by the Secretary's Certificate dated March 28, 2013, the cash dividend paid by Elematec Phil to Elematec Japan is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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