ITAD BIR Ruling No. 149-11

May 12, 2011 ITAD BIR RULING NO. 149-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 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 March 23, 2011, 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 ("Philippines-Japan tax treaty, as amended") . It is represented that Makoto Japan , with address at 3-13-56 Kamimuneoka Shiki-shi, Saitama, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the District Director of Asaka Tax Office on December 16, 2010; 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 March 22, 2011; 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. Moreover, it is represented, per the Resolution of the Board of Directors of Makoto Philippines dated March 21, 2011, that during their special meeting on March 11, 2011, the Board declared cash dividends in the amount of JP50,000,000.00 to be taken out of the fiscal year ended June 30, 2010 unrestricted retained earnings of Makoto Philippines in favor of the stockholders of record as of June 30, 2010, to be paid on April 29, 2011; that per certification issued by Makoto Philippines' Corporate Secretary on March 21, 2011, as of the date of declaration of dividends on March 11, 2011, Makoto Japan owns 750,000 common shares of stocks inclusive of the one (1) common share each issued of five (5) individual nominee-director shareholders, constituting 100% shares in Makoto Philippines valued at Php75,000,000.00; that the lists of stockholders of Makoto Philippines as of June 30, 2010 and as of March 11, 2011 are the same; and that Makoto Japan acquired the said shares in Makoto Philippines by subscription on September 29, 1993. TaDSHC It is finally represented, based on the Sworn Statement by the same Corporate Secretary on March 21, 2011, 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. xxx xxx xxx" In relation thereto, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which reads: "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: IAcDET 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. Considering that during the period of six (6) months immediately preceding the date of payment of cash dividend, Makoto Japan owns 100% shares in Makoto Philippines , which is more than the 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 (BIR Ruling No. ITAD 35-10 dated September 14, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 7-10 dated May 20, 2010) 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. aDTSHc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue