ITAD BIR Ruling No. 142-11

May 2, 2011 ITAD BIR RULING NO. 142-11 Article 10, Philippines-Japan Tax Treaty, as amended; BIR Ruling No. 8-10; BIR Ruling No. 7-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 35-10 Gulliver Integrated Outsourcing Inc. 4th Floor, 6788 Ayala Avenue, Oledan Square, Makati City Attention: Mary Jane Angat Gentlemen : This refers to your Tax Treaty Relief Application filed on March 4, 2011, on behalf of GULLIVER, INC. ("Gulliver") , requesting confirmation that dividends to be paid to it by GULLIVER INTEGRATED OUTSOURCING, INC. ("GIOI") 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") . It is represented that Gulliver is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 815-1, Ooze, Yasio City, Saitam Prefecture, Japan, per Certificate of Status of Taxable Person issued by the District Director of Koshigaya Tax Office dated January 28, 2011; that Gulliver is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated November 5, 2010; and that, on the other hand, GIOI is a domestic corporation registered with the Philippine Economic Zone Authority under Certificate of Registration No. 05-33-IT, and with office address at 4th Floor, 6788 Ayala Avenue, Oledan Square, Makati City. It is also represented that GIOI has an authorized capital stock of Six Million Pesos (P6,000,000), divided into Six Thousand (6,000) common shares, with a par value of One Thousand Pesos (P1,000), and out of the said authorized capital stock, 1,500 shares are issued and outstanding; that as of June 14, 2005, Gulliver, as one of the incorporators of GIOI, subscribed to 1,495 common shares, representing 99% of the total issued and outstanding shares of GIOI, as certified by Gulliver's Corporate Secretary, in the Secretary's Certificate dated December 23, 2010; that at the special meeting of the Board of Directors of GIOI held on August 28, 2010, it was resolved that a cash dividend amounting to Five Million Four Hundred Thousand Pesos (P5,400,000) payable not later March 31, 2011 to all stockholders of record in proportion to their respective shareholdings in GIOI; and that, per Sworn Statement of GIOI dated November 10, 2010, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. aSTAHD 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: 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 involved 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: aACHDS (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. xxx xxx xxx 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. xxx xxx xxx" Based on the above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent of the gross amount dividends if the latter holds at least 10 percent either of the voting shares or of the total shares 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 Gulliver owns more than 10 percent of the outstanding shares of the common voting stock of GIOI, 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 paid by GIOI to Gulliver 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 7-10 dated May 20, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 35-10 dated September 14, 2010) aDHCcE 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