ITAD BIR Ruling No. 144-11

May 4, 2011 ITAD BIR RULING NO. 144-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Asia Pacific Business Legal Consulting 2nd Floor Bldg., B. Mactan Marina Mall Mactan Economic Zone I Ibo, Lapulapu City 6015, Cebu Attention: Mr. Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on March 9, 2011 requesting confirmation that dividends to be paid by Cozo Philippines ("Cozo-Phil") to Cozo Filters Corporation ("Cozo-Japan") are subject to the preferential final withholding 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 Cozo-Japan, with principal address at 3-16-15 Shirokanedai, Minato-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty, as evidenced by its Residence Certificate issued by the District Director of Shiba Tax Office on January 28, 2011; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated January 27, 2011; and that, on the other hand, Cozo-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Mactan Economic Zone I, Lapulapu City, Cebu, Philippines. It is further represented that on January 25, 2011, the Board of Directors of Cozo-Phil., under Board Resolution No. 2 Series of 2011, declared cash dividends in the amount of Fifty-Five Million pesos (Php55,000,000.00) for the stockholders of record of Cozo-Phil as of January 15, 2011 to be taken out of its accumulated and unrestricted retained earnings as of fiscal year ending March 31, 2010; that based on the Secretary's Certificate issued by Cozo-Phil dated February 14, 2011, Cozo-Japan holds 384,995 common shares of the total 385,000 issued and outstanding shares of Cozo-Phil, which have a par value of PHP100.00 per share or, for Cozo-Japan, a total par value of PHP38,499,500.00, representing 99.99% ownership and shareholdings in Cozo-Phil; and that these shares are held by Cozo-Japan six months prior to the date of payment of the dividends on March 31, 2011. HIDCTA It is finally represented, per the Affidavit executed by the General Manager of Cozo-Phil dated February 11, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. 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 received 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. (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." In relation to a treaty, paragraphs 1, 2 and 3, Article 10 of the Philippines-Japan tax treaty, as amended, read: AcTDaH "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. 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." CTSHDI Based on the aforeqouted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Cozo-Japan holds directly 99.99% ownership and shareholding in Cozo-Phil (which is more than the minimum required of 10 percent), and that Cozo-Japan maintains this shareholding for at least six months immediately preceding the date of payment of the dividends on March 31, 2011, such dividends paid by Cozo-Phil to Cozo-Japan are subject to the preferential tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-11 dated January 28, 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