ITAD BIR Ruling No. 158-11

May 19, 2011 ITAD BIR RULING NO. 158-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-008-10 TOWA Semiconductor Equipment Philippines Corporation 121 East Science Avenue, Laguna Technopark Special Economic Zone, Bian, Laguna Attention: Mr. Misutaka Enomoto President Gentlemen : This refers to your letter dated January 6, 2010 requesting confirmation that dividends paid by TOWA SEMICONDUCTOR EQUIPMENT PHILIPPINES CORPORATION ("TOWA Philippines") to TOWA CORPORATION ("TOWA") are subject to a preferential tax rate of 10 per cent pursuant to 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 ("Philippines-Japan tax treaty") , as amended by a Protocol 1 effective January 1, 2009. It is represented that TOWA is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on the Certificate of Residence issued by the Shimogyo Tax Office in Japan on November 4, 2009; that TOWA is situated at 5 Kamichoshi-cho, Kamitoba, Minami-ku, Japan; that TOWA is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on October 30, 2009; and that, on the other hand, TOWA Philippines is a domestic corporation situated at 121 East Science Avenue, Laguna Technopark, SEZ, Bian, Laguna, Philippines. It is further represented that on June 6, 2009, the Board of Directors of TOWA Philippines , at its special meeting, declared cash dividend amounting to EIGHTEEN MILLION THREE HUNDRED SEVENTY THOUSAND PESOS (Php18,370,000.00), or ONE HUNDRED SIXTY SEVEN PESOS per share, in favor of the stockholders of record of TOWA Philippines as of March 31, 2009, based on the Certificate issued by the Corporate Secretary on June 10, 2009; that the dividends will be taken out of the unrestricted retained earnings of TOWA Philippines and payable on or before March 2010; that as of June 6, 2009, TOWA holds and owns 109,995 shares of stock of TOWA Philippines , each share with a par value of ONE HUNDRED PESOS (P100.00) or a total par value of TEN MILLION NINE HUNDRED NINETY-NINE THOUSAND FIVE HUNDRED PESOS (P10,999,500.00) equivalent to 99.45 percent, based on the Certificate issued by the same Corporate Secretary on November 24, 2009. EIDATc It is finally represented that the dividends subject of this 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, based on the Sworn Statement issued by the Accounting Officer of TOWA Philippines on July 5, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that the dividends paid to TOWA, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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): 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 Code provides that such dividends may be exempt from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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 this regard, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, and 3, 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: aAHSEC 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 of 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 of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) beginning, January 1, 2009, 10 percent of the gross amount of dividends if the company recipient of the dividends holds directly at least 10 percent of the voting shares or of 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 of the gross amount of the dividends if the company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. Accordingly, considering that TOWA holds directly at least 10 percent (in fact, 99.45 percent) of the total shares of TOWA Philippines during the period of six months immediately preceding the date of payment of the dividends (in fact, for at least nine months from the date of the declaration of the dividends in June 2009 to the date of payment of the dividends in March 2010), the cash dividends to be paid by TOWA Philippines to TOWA are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 008-10 dated June 3, 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. THaDEA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending 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.