ITAD BIR Ruling No. 158-14

August 18, 2014 ITAD BIR RULING NO. 158-14 Article 10, Philippines-Japan tax treaty, as amended Transnational Diversified Corporation The Penthouse, Net Quad Building 4th Avenue corner 30th Street E-Square Crescent Park West Bonifacio Global City, Taguig Attention: Socorro Z. Niro Chief Finance Officer Gentlemen : This refers to your application for tax treaty relief filed on September 5, 2013 requesting confirmation that dividends paid by Yusen Logistics Philippines, Inc. ("Yusen-Philippines") to Yusen Logistics Co., Ltd. ("Yusen") are subject to income tax at the rate of 10 percent 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that Yusen is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and Residence Certificate issued by the Shiba Tax Office in Japan on July 26, 2013; that Yusen is located at 2-11-1, Shiba-Koen Minato-ku, Tokyo, Japan; that Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 1, 2013, Yusen is not registered as a corporation or partnership in the Philippines; and that, on the other hand, Yusen-Philippines is a domestic corporation with principal office address at No. 4 P. Mayuga Street, MIA Road, Tambo, Paraaque City, Philippines. It is further represented that during a meeting of the board of directors of Yusen-Philippines held on June 7, 2013, Yusen-Philippines declared cash dividends amounting to P50,000,00.00 n (representing 7.93 percent of the Stockholder's Equity and 39.78 percent of the Corporation's unappropriated Retained Earnings as of March 31, 2013) in favor of the company's stockholders of record as of June 7, 2013, and payable in three installments on September 15, 2013, November 30, 2013 and March 30, 2014 respectively; and that as of June 27, 2011, Yusen holds 1,917,597 common shares or 38 percent of the total outstanding shares of stock Yusen-Philippines based on the Certification issued by the Corporate Secretary on August 30, 2013. It is finally represented that the dividends subject of this ruling are 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 Certification issued by the Corporate Secretary of Yusen-Philippines on June 13, 2013. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. AHDTIE (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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 5, 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: 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 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." HCITDc Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, at a rate not to exceed 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Considering that Yusen holds directly 38 percent of the total shares of Yusen-Philippines during a period of six months immediately preceding the date of first payment of the dividends or since June 27, 2011, such dividends paid by Yusen-Philippines to Yusen are subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, 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 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 effective January 1, 2009. n Note from the Publisher: Copied verbatim from the official copy. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.