ITAD BIR Ruling No. 151-15

May 4, 2015 ITAD BIR RULING NO. 151-15 Article 10 (Dividends), Philippines-Japan tax treaty JAE Philippines, Inc. Gateway Business Park Javalera, General Trias, Cavite Attention: Sinichi Kimura President Gentlemen : This refers to your tax treaty application ("TTRA") filed on October 23, 2014, requesting confirmation that dividends paid by JAE Philippines, Inc. ("JAE-PH") to Japan Aviation Electronics Industry, Ltd. ("JAE") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by the 2009 Protocol ("Philippines-Japan tax treaty") . It is represented that JAE is a foreign corporation organized and existing under the laws of Japan and is a resident thereof within the meaning of Article 4 of the Convention between the Philippines and Japan on the avoidance of double taxation with business address at 21-2, Dogenzaka 1-chome, Shibuya-ku, Tokyo, Japan 150-0043; that it is not registered as a corporation or a partnership in the Philippines per SEC certification issued on August 15, 2014; and that on the other hand, JAE is a domestic corporation duly organized and existing under the laws of the Philippines with principal address in Gateway Business Park, Javalera, General Trias, Cavite. It is also represented that JAE is the registered and beneficial owner of One Hundred Forty Thousand (140,000) shares including 5 nominee shares constituting One Hundred percent (100%) of the issued and outstanding shares in JAE-PH as of record date on June 26, 2014. The following are the details of the acquisition of shares of JAE-PH by JAE: Date issued No. of Shares May 30, 1996 24,000 September 30, 1997 72,000 December 31, 2001 44,000 Total 140,000 ====== It is also represented that on October 7, 2014, the board of directors of JAE-PH has declared cash dividend of USD6,300,000.00 from the corporation's unrestricted retained earnings for the first semester of the fiscal year ending March 31, 2015, in favor of all stockholders of record as of September 30, 2014, payable on or before November 7, 2014; that on November 7, 2014 JAE-PH paid the amount of USD6,700,000.00 to JAE per notarized certification issued by Mizuho Bank, Ltd. on November 24, 2014. It is also represented, per sworn certification issued by the President of JAE-PH on October 22, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividend paid to JAE is subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be subject to a reduced rate to the extent required by any treaty obligation on the Philippines, 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: 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." For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, & 3 of 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; 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 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 the dividends, shall not exceed 10 per cent of the gross amount of the dividends. Under paragraphs 2 and 3 of Article 10, 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; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, the dividend paid by JAE-PH to JAE is subject to income tax at the rate of ten percent (10%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty as (1) JAE holds 140,000 common shares constituting 100 percent of the total shares of JAE-PH, which is more than ten percent (10%) of the capital of the said company ; and (2) JAE holds the said shares during the period of more than 6 months immediately preceding the date of payment of the dividends on November 7, 2014 or since December 31, 2001. 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.