ITAD BIR Ruling No. 156-11

May 19, 2011 ITAD BIR RULING NO. 156-11 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 Follosco Morallos & Herce Attorneys-at-Law Suite 2500, 25th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City Attention: Rachell P. Follosco Froilyn D. Pagayatan Gentlemen : This refers to your letter dated June 11, 2009, on behalf of Global Metal Tech Corporation ("Global Metal") , requesting confirmation that cash dividends paid by Global Metal to Kishida Manufacturing Co., Ltd. (Kishida) are subject to the preferential tax rate of 10 percent based on Article 10 (2) (a) of 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 , as amended by a Protocol which took effect on January 1, 2009 ("Philippines-Japan tax treaty, as amended") . It is represented that Kishida (now Nippo Metal Tech Co. Ltd. ), with address at 12-72, Suzaki Uruma-shi, Okinawa 904-2234, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Status of Taxable Person issued by District Director of Okinawa Tax Office on February 4, 2010; that Kishida is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 10, 2009; and that, on the other hand, Global Metal is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at RBF 3, Block 4, Lot 4, Filinvest Technology Park, Ciudad de Calamba, Calamba City, Laguna. It is also represented that on June 8, 2009, the Board of Directors of Global Metal at its special meeting, unanimously approved a resolution for Global Metal to declare cash dividends amounting to Four Hundred Ninety-Four Japanese Yen (494.00) per share, or an aggregate of Twenty-Two Million Two Hundred Thirty Thousand Japanese Yen (22,230,000.00), in favor of the stockholders of record of Global Metal as of May 31, 2009 and payable in lump-sum or in tranches on or before June 30, 2009 based on the Certificate issued by the Corporate Secretary of Global Metal on June 10, 2009; that since July 16, 2004 up to the present, Kishida owns 44,995 of the 45,000 common shares of stock of Global Metal, each share with par value of Php100.00, or a total par value of Php4,499,500, or an aggregate par value amounting to Four Million Five Hundred Thousand Pesos (Php4,500,000), as evidenced by Secretary's Certificate dated June 10, 2009 and on the General Information Sheet of Global Metal for 2008. ISCaDH It is finally represented, based on the Sworn Statement by the same Corporate Secretary on March 22, 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. 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. SEHaTC 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 15 percent in all other cases. Accordingly, considering that Kishida holds directly at least 10 percent (in fact, 99.99 percent) of the common (voting) shares of stock during the period of six (6) months (in fact, since July 16, 2004 to present) immediately preceding the date of payment of the dividend on or before June 30, 2009, such dividends paid by Global Metal to Kishida are subject to tax at the preferential rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a) of 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) 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. TICDSc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue