ITAD BIR Ruling No. 168-14

September 18, 2014 ITAD BIR RULING NO. 168-14 Article 10, Philippines-Japan tax treaty AVC Chemical Corporation Richem Building E. Rodriguez Jr. Avenue Bagong Ilog, Pasig City Attention: Mr. Ernesto E. Lichauco Vice President Gentlemen : This refers to your tax treaty relief application filed on August 13, 2013 requesting confirmation that dividends paid by AVC Chemical Corporation ("AVC Chemical") to Ishihara Sangyo Kaisha Ltd. ("Ishihara Sangyo") are subject to a preferential tax 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 Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Ishihara Sangyo is a corporation organized and existing under the laws of Japan and a resident thereof based on the registration document issued by the Kita Branch Office of the Osaka Legal Affairs Bureau on June 26, 2013 and the Certificate of Status of Taxable Person issued by the Nishi Tax Office on March 12, 2013; that Ishihara Sangyo is located at 3-15, Edobori 1-Chome, Nishi-ku, Osaka, Japan; that it is not registered as a corporation or partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission on July 16, 2013; and that, on the other hand, AVC Chemical is a domestic corporation located at Richem Building, E. Rodriguez Jr. Avenue, Bagong Ilog, Pasig City, Philippines. It is further represented based on two Corporate Secretary's certificates issued by AVC Chemical on July 30, 2013 and August 14, 2012 that the Board of Directors of AVC Chemical , in a meeting on June 25, 2012, approved a resolution declaring cash dividends in the amount of P3.00 per share in favor of stockholders of record as of June 30, 2012; that as of June 30, 2012, Ishihara Sangyo holds 30 percent of the issued and outstanding shares of stock of AVC Chemical as described below: CSHEAI Acquisition Date Mode of Acquisition Number of Shares August 21, 1987 Initial Investment 120,000 June 15, 1993 62.5% stock dividend declaration 75,000 April 17, 1995 40% stock dividend declaration 78,000 April 30, 2004 80% stock dividend declaration 218,400 May 15, 2006 50% stock dividend declaration 245,700 May 30, 2008 50% stock dividend declaration 368,550 1,105,650 (P11,056,500.00) ============= It is finally represented based on a sworn statement issued by AVC Chemical and the electronically generated document issued by the Bank of the Philippine Islands, AVC Chemical remitted dividends to Ishihara Sangyo on October 17, 2013. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business in the Philippines is generally 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%)." aTICAc However, under Section 32 (B) (5) of the Tax Code, such income is 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." For this purpose, paragraphs 1 and 2, Article 10 of the Philippines-Japan tax treaty 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; ASHEca 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; in all other cases, the rate is 15 percent. Accordingly, since Ishihara Sangyo holds directly at least 10 percent of the total shares of AVC Chemical during the period of six months immediately preceding the date of payment of the dividends on October 17, 2013, where it actually holds 30 percent of these shares since May 30, 2008 , such dividends paid by AVC Chemical to Ishihara Sangyo are subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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.