ITAD BIR Ruling No. 165-11

May 27, 2011 ITAD BIR RULING NO. 165-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Sumisetsu Philippines, Inc. 8th Floor GC Corporate Plaza 150 Legaspi St., Legaspi Village Makati City Attention: Atty. Marilou A. Premediles Gentlemen : This refers to your tax treaty relief application filed on June 1, 2010 on the dividends paid by your company, SUMISETSU PHILIPPINES, INC. (SPI) to your parent company, SUMITOMO DENSETSU CO., LTD. (SDCL), 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 its Protocol which took effect on January 1, 2009 ("Philippines-Japan tax treaty, as amended") . It is represented that SDCL, with principal place of business at Mita-3 Chome, Minato-Ku Tokyo 109-8303 Japan, is a resident of and subject to taxation in Japan, per Residence Certificate issued by the District Director of Nishi Tax Office on January 7, 2010; that SDCL is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission on February 9, 2010; and that SPI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with address located at 8th Floor GC Corporate Plaza, 150 Legaspi St., Legaspi Village, Makati City; that, as shown in Secretary's Certificate issued by SPI on March 29, 2011, SPI has an authorized capital stock of P6,001,500.00 divided into 5,000 common shares, 1 1,000 redeemable preferred shares 'A', 2 and 1,500 redeemable preferred shares 'B'; 3 that as of April 15, 2010, SDCL and its nominees own P3,000,000.00 shares in SPI which constitute 49.987% shares therein, as shown below: Class Number Acquisition Acquisition Total Par Value Percentage of shares Dates Mode (in Pesos) of ownership in the Class of Shares Common 314 February 4, 1991 Original Subscription (2,000) 2 May 17, 1993 Assignment 2,000,000.00 40% 948 October 6, 1995 Stock Dividend 712 December 31, 1995 Assignment 8 April 15, 2008 Assignment 8 November 30, 2009 Assignment 8 April 7, 2010 Assignment Preferred 'A' 988 November 3, 2003 Conversion of (1,000) Debt to Equity 1,000,000.00 100% 4 April 15, 2008 Assignment 4 November 30, 2009 Assignment 4 April 7, 2010 Assignment Total 3,000 3,000,000.00 ===== =========== It is further represented, based on the Secretary's Certificate issued by SPI on May 11, 2010, that at the meeting of the Board of Directors of SPI on April 15, 2010, a resolution was approved declaring cash dividend in the amount of Twenty-four Million Three Hundred Forty-five Thousand Pesos (P24,345,000.00) from SPI's unrestricted retained earnings as of December 31, 2009, payable on June 28, 2010 to SPI's shareholders as of December 31, 2009, as follows: aSIETH Class of Shares Amount Common P1,150,000.00 Preferred 'A' P23,194,652.08 Preferred 'B' P347.92 It is finally represented that the transaction subject of the herein TTRA is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per the sworn certification executed by the President of SPI on May 31, 2010. In reply, please be informed that dividends derived in the Philippines by a nonresident foreign corporation, as in the instant case SPI, is generally governed by Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides, viz. : "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 . . . dividends, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, the said income may be exempt or, partially exempt from Philippine income tax. It provides, viz. : "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 accordance with the foregoing, you now invoke Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. It provides, viz. : "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. 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. CaTcSA 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 above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter holds at least 10 percent either of the voting shares or of the total shares of the Philippine company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent preferential tax rate shall apply. In view thereof and considering that SDCL holds 49.987% shares in SPI during and more than the period of 6 months prior to the date of payment of the dividends on June 28, 2010, this Office is of the opinion and so holds that the dividends which were paid by SPI to SDCL are subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-07-10 dated May 20, 2010; BIR Ruling No. ITAD-08-10 dated June 03, 2010; BIR Ruling No. ITAD-11-10 dated June 16, 2010; BIR Ruling No. ITAD-35-10 dated September 14, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Common shares have par value of P1,000.00 per share. 2. Preferred 'A' shares have par value of P1,000.00 per share, and are redeemable, non-voting, convertible, and preferred over common shares with respect to dividends and the distribution of assets upon liquidation of SPI. 3. Preferred 'B' shares have par value of P1.00 per share, and are redeemable, non-voting, convertible, and preferred over common shares with respect to dividends and the distribution of assets upon liquidation of SPI.