ITAD BIR Ruling No. 161-14

August 18, 2014 ITAD BIR RULING NO. 161-14 Article 10, Philippines-Japan tax treaty Imasen Philippine Manufacturing Corporation 101 East Main Avenue Laguna Technopark Bian, Laguna Attention: Akihito Yoshida President Gentlemen : This refers to your application for tax treaty relief filed on March 25, 2014 requesting confirmation that dividends paid by Imasen Philippine Manufacturing Corporation ("Imasen Philippines") to Mitsubishi Corporation ("Mitsubishi") 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 ("Philippines-Japan tax treaty") as amended by a Protocol. 1 Facts Mitsubishi is a corporation organized and existing under the laws of Japan and is a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Kojimachi Tax Office in Japan on February 13, 2014. Mitsubishi is located at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan. Mitsubishi has a permanent establishment in the Philippines in the nature of branch , namely, Mitsubishi Corporation-Manila Branch ("Mitsubishi Manila Branch") , which is registered with and licensed by the Securities and Exchange Commission under SEC Registration No. F000000491; Mitsubishi Manila Branch is located at 14th Floor, LV Locsin Building, 6752 Ayala Avenue corner Makati Avenue, Makati City, Philippines. On the other hand, Imasen Philippines is a domestic corporation situated at 101 East Main Avenue, Laguna Technopark, Bian, Laguna, Philippines. Based on the Secretary's Certificate issued on March 24, 2014 and the accompanying Minutes of the Special Meeting, the Board of Directors of Imasen Philippines (during a special meeting on March 17, 2014) declared cash dividends of 1,400.00 per share or an aggregate amount P100,326,336.21 in favor of its stockholders of record as of March 17, 2014. The dividends will be taken out of the company's earned surplus as of December 31, 2013, and will be paid on March 28, 2014. As of March 17, 2014, Mitsubishi owns 16,249 (P16,249,000.00) shares of stock of Imasen Philippines equivalent to 10 percent of the total shares of stock of Imasen Philippines which Mitsubishi acquired through subscription on December 10, 1997. HCITDc Based on the Affidavit issued by the Mitsubishi Manila Branch on February 27, 2014, Mitsubishi Manila Branch has no investment in Imasen Philippines ; the dividend income derived by Mitsubishi from its investment in Imasen Philippines , is neither connected with, nor resulting from the ordinary course of trade or business of Mitsubishi Manila Branch ; and the shares held by Mitsubishi in Imasen Philippines were acquired by Mitsubishi without the participation of Mitsubishi Manila Branch ; all gains inured to the sole benefit of Mitsubishi and Mitsubishi Manila Branch did not receive any of the gains; and lastly, Mitsubishi Manila Branch is not a material factor in the realization of any gain received by Mitsubishi. Finally, it is represented that the dividends subject of this ruling are not subject of 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 Assistant Manager of Imasen Philippines on March 21, 2014. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, 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, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. ETDaIC (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. Paragraphs 1, 2 and 5, n 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. ESTaHC 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. 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." 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 (a) 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; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, since Mitsubishi holds directly at least 10 percent of the voting shares or the total shares of Imasen Philippines (in fact, Mitsubishi holds 10 percent of such shares since December 10, 1997 ), and since Mitsubishi , on the other hand, is not registered with the Board of Investments as such, such dividends paid by Imasen Philippines to Mitsubishi are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. DTIcSH However, under paragraph 5, Article 10 of the tax treaty, since Mitsubishi has a permanent establishment in the Philippines through Mitsubishi Manila Branch , 2 the reduced rate of income tax will not apply to dividends paid to Mitsubishi if the shares in respect of which the dividends are paid are effectively connected with Mitsubishi Manila Branch , thus: "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." On the question of dividends being effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: " Paragraph 4 31. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 is not based on such a conception which is sometimes referred to as "the force of attraction of the permanent establishment". It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident of the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 4 relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7. (Page 193) aETDIc On whether the dividends paid by Imasen Philippines to Mitsubishi are effectively connected with Mitsubishi Manila Branch , it appears that this is not the case since Mitsubishi Manila Branch has no relation, participation or intervention directly or indirectly on the acquisition or subscription by Mitsubishi of the shares in Imasen Philippines ; the shares were acquired by Mitsubishi directly and independently of Mitsubishi Manila Branch ; and ownership of and subscription to the shares are solely between Mitsubishi and Imasen Philippines . This being so, such dividends paid to Mitsubishi are clearly subject to income tax at the rate of 10 percent of the gross amount thereof. 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. 2. Pursuant to paragraph 2 (b), Article 5 of the Philippines-Japan tax treaty, which provides: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ;" n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision. n Note from the Publisher: Copied verbatim from the official copy. Paragraph "5" should read as paragraph "3".