ITAD BIR Ruling No. 151-11

May 16, 2011 ITAD BIR RULING NO. 151-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 055-10; BIR Ruling No. ITAD 057-10; BIR Ruling No. ITAD 059-10 Fujitsu Ten Solutions Philippines, Inc. 8th Floor, East Tower, Philippine Stock Exchange Center Ortigas Center, Pasig City Attention: Mr. Vernon Valones Manager General Administration Department Gentlemen : This refers to your application for the tax treaty relief dated September 29, 2010 requesting confirmation that dividends paid by Fujitsu Ten Solutions Philippines, Inc. ("Fujitsu Philippines") to Fujitsu Ten Limited ("Fujitsu") are subject to income tax in the Philippines at a rate not to exceed 10 percent based on the gross amount thereof pursuant to 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 by the 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. Basic Facts It is represented that Fujitsu is a foreign corporation organized and existing under the laws of Japan and is a resident thereof based on its Articles of Incorporation, as amended, and on the Certificate of Residence issued by the Hyogo Tax Office in Japan on October 18, 2010; that Fujitsu is situated at 2-28, Gosho-dori, 1-chome Hyogo-ku, Kobe, Hyogo, Japan; that Fujitsu is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation issued by the Securities and Exchange Commission on October 14, 2010; and that, on the other hand, Fujitsu Philippines is a domestic corporation situated at 8th Floor East Tower, Philippine Stock Exchange Center, Ortigas Center, Pasig City, Philippines. It is also represented that on June 16, 2010, the Board of Directors of Fujitsu Philippines approved a resolution declaring cash dividends amounting to Php13,109,382.08 in favor of the stockholders of record of Fujitsu Philippines as of July 16, 2010, based on the Certificate issued by the Corporate Secretary of Fujitsu Philippines on January 17, 2011; that the dividends will be taken out of the unappropriated retained earnings of Fujitsu Philippines as of March 31, 2010, and payable on or before September 30, 2010 at the rate of Php43.70 per share; that as of August 10, 1999, to present, Fujitsu owns 240,000 common shares of stock of Fujitsu Philippines , inclusive of the 9 shares held by 9 individual directors each share with a par value of Php100.00, or a total of Php24,000,000.00, which constitute 80 percent of the total capital stock of Fujitsu Philippines . acEHSI It is finally represented that the dividends subject of this ruling are not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings, or judicial appeal based on the Certification executed by the Manager of the General Administration Department of Fujitsu Philippines on September 28, 2010. Ruling A. On income tax In reply, please be informed that dividends paid to Fujitsu , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent. Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: "SEC. 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 interests, 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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Under Section 32 (B) (5) of the Code, however, such dividends may be exempt or subject to a reduced rate to the extent required by any treaty obligation binding upon the Philippine Government, thus: "SEC. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, you invoke the Philippine-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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; TaEIcS (b) 15 per cent of the gross amount of the dividends in all other cases. (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." Based on the above-quoted 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 if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends, during the period of six months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15 percent in all other cases. Accordingly, since Fujitsu holds directly at least 10 percent of the total shares of stock of Fujitsu Philippines during the period of six months immediately preceding the date of payment of the dividends (in fact, 80 percent of the total shares since August 10, 1999 to present), such dividends paid by Fujitsu Philippines to Fujitsu are subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling ITAD 055-10 dated October 22, 2010; BIR Ruling No. ITAD 057-10 dated October 22, 2010; and BIR Ruling No. ITAD 059-10 dated November 3, 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. cHaADC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue