ITAD BIR Ruling No. 157-12

April 10, 2012 ITAD BIR RULING NO. 157-12 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 204-11 HKT Philippines, Inc. Carmelray Industrial Park II Barangay Punta, Calamba City Laguna, Philippines Attention: Anthony D. Torres President Gentlemen : This refers to your tax treaty relief application filed on December 1, 2011, on behalf of HKT Corporation ("HKT Japan"),requesting confirmation that the dividends received by HKT Japan from HKT Philippines, Inc. ("HKT Phil.") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) 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"). Facts It is represented that HKT Japan is a corporation organized and existing under the laws of Japan and a resident thereof situated at 1457 Narahara-cho, Hachioji-City, Tokyo Japan, per Certificate of Residence issued by the Hachioji Tax Office of Japan dated June 16, 2011; that HKT Japan is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 10, 2010; and that, on the other hand, HKT Phil. is a corporation organized and existing under the laws of the Philippines with principal address at Carmelray Industrial Park II, Barangay Punta, Calamba City, Laguna, Philippines. It is further represented, per Secretary's Certificate issued by HKT Phil. dated October 27, 2011, that on September 10, 2011, the Board of Directors declared cash dividends of Php18,000,000.00 out of its retained earnings to the stockholders, to be distributed according to the shareholders' present capita contribution, payable on December 15, 2011; and that since April 21, 2008, HKT Japan's total stockholdings in HKT Phil. is 36,536 common shares with a par value of Php1,000.00 per share, representing 59.99% of the total shares of HKT Phil. CSHEca It is finally represented, per Certification dated November 25, 2011 issued by HKT Phil.,that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling 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 income derived in the Philippines 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. 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." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, 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 percent 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; EaISTD 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. 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. xxx xxx xxx Based on the aforequoted provisions, the Philippines may tax the dividends paid by 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 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 thereof. In view thereof and considering that HKT Japan holds directly 59.99 percent of shareholdings in HKT Phil. or more than the required minimum shareholdings of 10 percent, for a period of 6 months immediately preceding the date of payment, said dividends paid by HKT Phil. to HKT Japan 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-204-11 dated August 3, 2011) 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. AIDcTE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue