ITAD BIR Ruling No. 143-13

May 21, 2013 ITAD BIR RULING NO. 143-13 Article 10, Philippines-Japan tax treaty, as amended HS Technologies (Phils.), Inc. Main Avenue, Cavite Economic Zone Rosario, Cavite 4106 Attention: Mr. Mario Ponce de Leon Treasurer Gentlemen : This refers to your tax treaty relief application filed on July 20, 2012, on behalf of Suzucoh Industrial, Ltd. ("Suzucoh") , requesting confirmation that the dividend payments to it by HS Technologies (Phils.), Inc. ("HS Tech") are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (b) of 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. HaTISE It is represented that Suzucoh , with address at 13-12 Kitamikata, 1-chome, Takatsu-ku, Kawasaki-shi, Kaganawa-Ken, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the Kawasaki-kita Tax Office on July 24, 2012; that Suzucoh is not registered either 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 May 8, 2012; that HS Tech , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Main Avenue, Cavite Economic Zone, Rosario, Cavite; and that HS Tech is registered with the then Export Processing Zone Authority (now Philippine Economic Zone Authority [PEZA]) as an Ecozone Export Enterprise with Registration No. 94-100 dated December 14, 1994. It is further represented that on April 13, 2012, the Board of Directors of HS Tech approved a resolution to declare cash dividends in the amount of Four Hundred Thirty-five Thousand Four Hundred Ninety-eight Dollars ($435,498.00) to be distributed to the stockholders of record as of period ended December 31, 2011; that Suzucoh holds 175,113 common shares in HS Tech valued at Php17,511,300.00 representing 50% of the total subscribed shares in HS Tech ; and that Suzucoh acquired the said shares in HS Tech by sale/subscription on July 11, 1995; and that per Certification issued by Mizuho Corporate Bank, Ltd. Manila Branch, the said dividends were paid on July 25, 2012. It is finally represented, based on the Sworn Statement by HS Tech on June 13, 2012, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. 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%). TIEHSA 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 relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: TaCDIc "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 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. 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 foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof 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 of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. AcICHD Considering that Suzucoh owns 50 percent shareholdings in HS Tech since July 11, 1995 more than six (6) months immediately preceding the date of payment of cash dividend, which is more than the 10 percent shareholding requirement of the total shares issued by HS Tech , the dividends paid by HS Tech to Suzucoh are subject to the preferential tax rate of 10 percent of 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 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