ITAD BIR Ruling No. 153-11

May 19, 2011 ITAD BIR RULING NO. 153-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-011-10; BIR Ruling No. ITAD 035-10 Terumo Marketing Philippines, Inc. W-3203 A & B, PSE Center Exchange Road, Ortigas 1605 Pasig City Attention: Koichi Nagashima President Gentlemen : This refers to your tax treaty relief application filed on February 7, 2011, on behalf of Terumo Corporation (Terumo Corp.) requesting confirmation that dividend payments made by Terumo Marketing Philippines, Inc. (Terumo Marketing) to Terumo Corp. are subject to the 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 Terumo Corp. , with address at 44-1, 2-Chome, Hatagaya, Shibuya-Ku, Tokyo, Japan, is a resident of Japan under the provisions of the Philippines-Japan tax treaty per the Certificate of Residence issued by the District Director of Shibuya Tax Office on January 19, 2011; that the petition for withdrawal of its license to transact business in the Philippines was approved on January 10, 2002 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated July 15, 2010; and that Terumo Marketing , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at W-3203 A & B, PSE Center, Exchange Road, Ortigas, Pasig City. It is also represented, per Corporate Secretary's Certificate issued by Terumo Marketing dated February 4, 2011, that the Board of Directors of Terumo Marketing declared cash dividends as follows: Date of Declaration of Amount of Date of Record Date of Payment Dividends Dividends 9th Organizational Meeting/ P27,090,000.00 March 31, 2009 March 31, 2010 June 17, 2009 10th Organizational Meeting/ P15,962,000.00 March 31, 2010 February 11, 2011 June 29, 2010 Moreover, as shown in the Corporate Secretary's Certificate issued by Terumo Marketing dated February 21, 2011, as of November 30, 2010, out of Terumo Marketing's 54,000 common shares valued at P1,000.00 each, 13,500 common shares valued at P13,500,000.00 are subscribed and paid up; that out of the said 13,500 subscribed and paid-up common shares of Terumo Marketing, Terumo Corp. owns P13,495 shares with a total value of P13,495,000.00, equivalent to 99.99% shares in Terumo Marketing ; and that Terumo Corp. initially contributed its cash investments for its share of stock at the time of the incorporation of Terumo Marketing . caADIC Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by Terumo Marketing dated December 7, 2010. 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 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%)." 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. Its Article 10 provides that: "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. AIDTSE 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. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State." 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. For the dividends declaration on June 29, 2010, since during the period of six (6) months immediately preceding the date of payment, which was on February 11, 2011, Terumo Corp. owns 99.99% common shares in Terumo Marketing , which is more than the 10 percent shareholding requirement of the total shares issued by that company, as shown in the certification issued by the Corporate Secretary of Terumo Marketing dated February 4, 2011, then said dividends paid by Terumo Marketing to Terumo Corp. are subject to 10 percent of the gross amount of dividends, pursuant to Article 10 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) HTCSDE However, as to the dividend declaration on June 17, 2009, please be informed that Sections 14 and 13 of Revenue Memorandum Order ("RMO") No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) , effective November 4, 2010 , provide: "Section 14. WHEN AND WHERE TO FILE THE TTRA. xxx xxx xxx Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under the RMO. "Section 13. DEFINITIONS. xxx xxx xxx 4. First taxable event for purposes of filing the Tax Treaty Relief Application (TTRA), shall mean the first or the only time when the income payor is required to withhold the income tax thereon or should have withheld taxes thereon had the transaction been subjected to tax . . ." Under the RMO, the filing of TTRAs should be made before the occurrence of the first taxable event, or the first or the only time when an income payor is required to withhold income tax on payments subject to preferential treatment. The first or only time referred herein corresponds to the period a withholding agent is required to file the necessary returns on final and creditable income taxes withheld in a particular month , which is within ten days after the end of that month , or, if the withholding was made in December, on or before January 15 of the following year, pursuant to Section 2.58 (A) (2) of Revenue Regulations No. 2-98 (Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes) , thus: "SECTION 2.58. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE. (A) Monthly return and payment of taxes withheld at source xxx xxx xxx (2) WHEN TO FILE HIaTCc (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year . . ." (Emphasis added) Considering that the TTRA on the dividends declared on June 17, 2009 and paid on March 31, 2010 was filed only February 7, 2011 , the said having been filed beyond the period prescribed under RMO 22-2010, and is therefore disqualified under the same then, such dividends paid by Terumo Marketing to Terumo Corp. will be subject to the regular income tax rate of 30 percent of the gross amount thereof, under Section 28 (B) (1) of the National Internal Revenue Code of 1997, 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