ITAD BIR Ruling No. 141-12

March 28, 2012 ITAD BIR RULING NO. 141-12 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 204-11 International Electric Wires Phils. Corporation Luisita Industrial Park Special Economic Zone San Miguel, Tarlac Philippines Attention: Edwin P. Gonzales Treasurer and AVP for Finance and Administration Gentlemen : This refers to your tax treaty relief application filed on November 24, 2011, on behalf of Sumitomo Wiring Systems Ltd. ("Sumitomo"),requesting confirmation that the dividends to be paid by International Electric Wires Phils. Corporation ("IEWP") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) 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"). Facts It is represented that Sumitomo is a corporation organized and existing under the laws of Japan and a resident thereof situated at 1-14 Nishisuehiro-cho, Yokkaichi, Mie, 510-8503 Japan, per Certificate of Residence issued by the Yokkaichi Tax Office of Japan dated September 14, 2011; that Sumitomo is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 21, 2011; and that, on the other hand, IEWP is a corporation organized and existing under the laws of the Philippines with principal address at Luisita Industrial Park Special Economic Zone, San Miguel, Tarlac, PHILIPPINES. It is further represented, per Secretary's Certificate issued by IEWP dated November 16, 2011, that on October 29, 2011, the Board of Directors declared cash dividends of US$1,219,770.36 equivalent to 16.22% of the Fiscal Year 2010 audited income and part of the unrestricted retained earnings, which shall be shared by the stockholders in accordance with their capital contribution, payable on November 30, 2011; and that since October 5, 1995, Sumitomo's total stockholdings is of 13,500,000 common shares with a par value of Php10.00 per share, representing 54% of the total shares of IEWP. aESIDH It is finally represented, per Certification dated November 24, 2011 issued by IEWP, 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 Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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, 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." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: CaTcSA "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. 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. xxx xxx xxx 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 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 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. DIESHT In view thereof and considering that Sumitomo holds directly 54 percent of shareholdings in IEWP, or more than the required minimum shareholdings of 10 percent, for a period of 6 months immediately preceding the date of payment, said dividends paid by IEWP to Sumitomo are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-204-11 dated August 3, 2011) 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