ITAD BIR Ruling No. 157-11

May 19, 2011 ITAD BIR RULING NO. 157-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-007-10 Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St., Bakilid, Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Atty. Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application filed on June 7, 2010, on behalf of Maruemu Diecast Co., Ltd. ("Maruemu") requesting confirmation that the dividends received from Makoto Metal Technology, Inc. ("Makoto") are subject to 10 percent withholding tax pursuant to Article 10 of 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 Maruemu, with address at 3-13-56 Kamimuneoka Shiki City Saitama, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Certification of the Country of Residence issued by the District Director of Asaka Tax Office on June 24, 2010; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated August 25, 2010; and that, on the other hand, Makoto with principal address at Phase 1, Lots 4 A & B, Block 5, Mepz II, Basak, Lapulapu City, Cebu, is a corporation organized and existing under the laws of the Philippines, registered with the Philippine Economic Zone Authority (PEZA) to engage in the business of manufacturing, exporting, processing, and diecasting of aluminum and zinc alloy, as well as component parts for microscope, binoculars, optical devices, etc. It is further represented, per Secretary's Certificate issued by Makoto on June 4, 2010, that that Maruemu holds 100% of the stockholdings of Makoto, and such shareholdings were acquired six (6) months prior to the date of payments of the dividends declared by Makoto; that on June 4, 2010, the Board of Directors of Makoto declared an amount of JP35,000,000.00 as cash dividend to be taken out of the accumulated unrestricted retained earnings or surplus profit of Makoto as of fiscal year ended September 30, 2009 in favor of the stockholders of record as of same date; and that per notarized Certification issued by the Corporate Secretary of Makoto dated June 16, 2010, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. aAIcEH In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (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." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. It provides: "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. 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." DSAEIT Based on the aforequoted provisions, the Philippines may tax the dividends paid by a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount. In view thereof and considering that Maruemu holds directly 100% of the shareholdings in Makoto for a period of 6 months immediately preceding the date of payment of the dividends, said dividends are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010) This ruling is issued on the basis of the foregoing 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