ITAD BIR Ruling No. 165-12

April 19, 2012 ITAD BIR RULING NO. 165-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 SGV & Co. 6750 Ayala Avenue 1226 Makati City Attention: Fabian K. de los Santos Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 29, 2011 requesting confirmation that the dividends paid by Rohm Mechatech Philippines, Incorporated ("Rohm Phil") to Rohm Mechatech Co., Ltd. ("RMCL") and Rohm Company Limited ("RCL") are subject to the preferential tax treaty rate of 10 percent pursuant to 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") . DTcHaA It is represented that RCL, with principal office at 21 Saiin Mizosaki-cho Ukyo-ku, Kyoto 615-8585, Japan, and RMCL, with principal office at 3-6-1, Tsuchida, Ooi-cho, Kameoka, Kyoto 621-0011, Japan, are foreign corporations organized and existing under the laws of Japan and are residents thereof within the meaning of the Philippines-Japan tax treaty, based on the Certifications issued respectively by the District Director of Sonobe Tax Office dated August 12, 2011 and the District Director of Ukyo Tax Office dated August 23, 2011; that both RMCL and RCL are not registered as corporations or partnerships in the Philippines as certified by the Securities and Exchange Commission on July 4, 2011; and that, on the other hand, Rohm Phil. is a corporation duly organized and existing under the laws of the Philippines with office address at People's Technology Complex, Special Economic Zone, Carmona, Cavite, Philippines. It is further represented that on September 1, 2011, the Board of Directors of Rohm Phil. approved the declaration of cash dividends at 1,420 per share for 1,500,000 shares in the total amount of 2,130,000,000 out of the unrestricted retained earnings of Rohm Phil. as of March 31, 2011, in favor of its stockholders of record payable on November 2011; that RMCL holds 1,125,000 shares constituting 75 percent of the issued and outstanding shares of Rohm Phil., while RCL, on the other hand, holds 375,000 shares of Rohm Phil. with a par value of P100.00 per share which corresponds to 25 percent of the total outstanding capital stock of Rohm Phil.; that RMCL and RCL acquired their respective shares in Rohm Phil. on various dates starting November 23, 1993 up to September 13, 2005 as certified by the Assistant Corporate Secretary of Rohm Phil. on October 3, 2011; and that the transaction subject of this TTRA 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 Certification issued by the General Manager of Rohm Phil. on September 28, 2011. It is finally represented that dividends in the amounts of 1,437,750,000 and 479,250,000 were respectively paid by Rohm Phil. to RMCL and RCL on November 25, 2011 as evidenced by the Certification of Remittances issued by the Bank of Tokyo-Mitsubishi UFJ Manila branch dated January 26, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, provides as follows: "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 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%). xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax or partially exempt, if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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" Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. It provides: "Article 10 DIVIDENDS 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. 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-quoted provisions, 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, during the period of six months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15 percent in all other cases. Accordingly, since RMCL and RCL respectively hold 75 and 25 percent of the total shares of stock of Rohm Phil. from 1993 up to 2005, such dividends paid by Rohm Phil. to RMCL and RCL are subject to income tax at the rate of 10 percent of the gross amount thereof pursuant to Article (2) (a) of the Philippine-Japan tax treaty, as amended. (BIR Ruling ITAD 007-10 dated May 20, 2010.) 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. HDCTAc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue