ITAD BIR Ruling No. 166-14

September 15, 2014 ITAD BIR RULING NO. 166-14 Article 10, Philippines-Japan tax treaty International Electric Wires Phils. Corp. Luisita Industrial Park-Special Economic Zone San Miguel, Tarlac City Attention: Mr. Edwin P. Gonzales VP FAD and Treasurer Gentlemen : This refers to your application for tax treaty relief filed on January 16, 2014 requesting confirmation that dividends paid by International Electric Wires Phils. Corp. ("IEWPC") to Sumitomo Wiring Systems, Ltd. ("Sumitomo Wiring") 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 Sumitomo Wiring is a corporation organized and existing under the laws of Japan and is a resident thereof based on its Articles of Incorporation and Residence Certificate issued by the Yokkaichi Tax Office in Japan on November 15, 2013. Sumitomo Wiring is located at 1-14 Nishisuehiro-cho, Yokkaichi, Mie, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on December 3, 2013, Sumitomo Wiring is not registered as a corporation or partnership in the Philippines. On the other hand, IEWPC is a domestic corporation situated at Luisita Industrial Park Special Economic Zone, San Miguel, Tarlac City, Philippines. Based on the Secretary's Certificate issued on January 8, 2014, the Board of Directors of IEWPC (during a special meeting on November 26, 2013) declared cash dividends amounting to US$2,038,063.09, which is equivalent to 26.214 percent of previous year's net income, which shall be shared by the shareholders in accordance with their capital contribution to be paid out to all shareholders on or before January 31, 2014. As of declaration date, Sumitomo Wiring holds 36 percent of the total shares of stock of IEWPC as described below: ACaDTH Stockholder Number and Par Mode of Acquisition Date Percentage of Value of Shares Acquisition Ownership Sumitomo 9,000,000 By purchase October 5, 1995 36 percent Wiring Total 9,000,000 (P90,000,000.00) ============= Based on the Certification issued by Bank of Tokyo-Mitsubishi UFJ-Manila Branch 2 on February 10, 2014, such dividends were remitted by IEWPC to Sumitomo Wiring on January 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. DIETcH (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 and 2, 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. DHETIS 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." 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. Accordingly, since Sumitomo Wiring holds directly at least 10 percent of the total shares of IEWPC during a period of six months immediately preceding the date of payment of the dividends on January 21, 2014, where Sumitomo Wiring actually holds 36 percent of these shares since October 5, 1995 , such dividends paid by IEWPC to Sumitomo Wiring 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. ACDIcS 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. Located at 15th Floor, 6788 Ayala Avenue, Makati City, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.