ITAD BIR Ruling No. 167-15

June 2, 2015 ITAD BIR RULING NO. 167-15 Article 10, Philippines-Japan tax treaty, as amended Yutaka Manufacturing (Philippines), Inc. 110 North Science Avenue, Laguna Technopark Bian, Laguna Attention: Mr. Yoshihide Kageyama President Gentlemen : This refers to your application for tax treaty relief filed on September 26, 2014 requesting confirmation that dividend paid by Yutaka Manufacturing (Philippines), Inc. ("Yutaka-Phil") to Yutaka Giken Co., Ltd. ("Yutaka-Japan") is 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") . Facts Yutaka-Japan is a corporation organized and existing under the laws of Japan and is a resident thereof based on its Certification of Comprehensive Historical Background and Residence Certificate issued by the Hamamatsuhiwashi Tax Office in Japan on August 8, 2014. Based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 17, 2014, Yutaka-Japan is not registered as a corporation or partnership in the Philippines. On the other hand, Yutaka-Phil is a domestic corporation organized and existing under Philippine laws. Based on the Secretary's Certificate issued on August 11, 2014, the Board of Directors of Yutaka-Phil , during an organizational meeting on July 30, 2014, declared cash dividends amounting to P8,724,277.00 in favor of the company's stockholders of record as of March 31, 2014, and payable on or before March 31, 2015. As of record date, Yutaka-Japan holds 529,995 (excluding five shares held by trustees) common shares of Yutaka-Phil equivalent to an amount of P529,995,000.00, representing 99.99 percent ownership in Yutaka-Phil since February 6, 2003. Finally, the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceeding, or judicial appeal, based on the Affidavit issued by the President of Yutaka-Phil on September 10, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, 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 . (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. 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." 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 Yutaka-Japan holds directly at least 10 percent of the total shares of Yutaka-Phil during a period of six months immediately preceding the date of payment of the dividends, where Yutaka-Phil actually holds 99.99 percent of these shares since February 6, 2003 , such dividend paid by Yutaka-Phil to Yutaka-Japan 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: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.