ITAD BIR Ruling No. 143-14

August 14, 2014 ITAD BIR RULING NO. 143-14 Article 10, Philippines-Japan tax treaty, as amended Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Bakilid, Mandaue City Cebu Attention: Atty. Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application filed on December 14, 2012, on behalf of Makoto Light Metal Co. Ltd. ("Makoto Japan") , requesting confirmation that dividend payments made by Philippine Makoto Corporation ("Makoto Philippines") to Makoto Japan are subject to 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 1 ("Philippines-Japan tax treaty, as amended"). It is represented that Makoto Japan , with address at 3-13-56 Kamimuneoka Shiki City, Saitama, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certification by the Tax Authorities of the Country of Residence issued by the District Director of Asaka Tax Office on October 12, 2012; that Makoto Japan 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 December 20, 2012; and that Makoto Philippines , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 4th Street, 3rd Avenue, Mactan Ecozone I, Lapulapu City, Cebu, Philippines. It is further represented that during the special meeting held on December 12, 2012, the Board of Directors of Makoto Philippines declared cash dividends in the amount equivalent to JP40,000,000.00 to be taken out of the 2012 unrestricted retained earnings of Makoto Philippines as of fiscal year ended June 30, 2012 in favor of the stockholders of record as of even date, per Resolution of the Board dated December 12, 2012; that Makoto Japan owns 750,000 common shares of stocks, including common shares issued to five (5) individual nominee-directors, constituting 100% ownership in Makoto Philippines valued at Php75,000,000.00 as of the date of declaration of dividends on December 12, 2012 and as of the date of payment; that Makoto Japan acquired the said shares in Makoto Philippines by subscription on September 29, 1993; and that based on Bank Certification of RCBC dated December 21, 2012, Makoto Philippines remitted the said dividends to Makoto Japan on December 18, 2012. SaCIDT It is finally represented, based on the Sworn Statement by the same Corporate Secretary on December 12, 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%). 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. DaCTcA xxx xxx xxx" In relation thereto, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, 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: 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. 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. . . ." cDAEIH 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. Considering that Makoto Japan is a resident of Japan with no fixed place of business in the Philippines, and that during the period of six (6) months immediately preceding the date of payment of cash dividend or since September 29, 1993, Makoto Japan owns 100% shares in Makoto Philippines , which is more than 10 percent shareholding requirement of the total shares issued by Makoto Philippines , the dividends paid by Makoto Philippines to Makoto Japan 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 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 Footnotes 1. Protocol Amending 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 effective January 1, 2009.