ITAD BIR Ruling No. 170-15

June 2, 2015 ITAD BIR RULING NO. 170-15 Article 10, Philippines-Japan tax treaty, as amended Buag & Lotilla Law Offices Suites A & B, 10th Floor Strata 100 Building F. Ortigas, Jr. Road (formerly Emerald Avenue) Ortigas Center, Pasig City Attention: Atty. Jose Mario C. Buag Atty. Leo Angelo A. Quismorio Gentlemen : This refers to your tax treaty relief application filed on January 7, 2014, on behalf of Asian Transmission Corporation ("ATC"), requesting confirmation that the dividend paid by ATC to Mitsubishi Motors Corporation (" Mitsubishi ") is subject to 10 percent preferential tax rate 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 "). It is represented that Mitsubishi is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Domicile issued by the District Director of Shiba Tax Office on December 6, 2013; that Mitsubishi 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 Securities and Exchange Commission dated December 19, 2013; and that ATC, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines; that ATC is registered with Board of Investments (BOI) as new producer (pioneer) enterprise for the products and capacities of automotive gasoline. It is also represented that at the Special Meeting of the Board of Directors of ATC on December 18, 2013, the Board approved the declaration of a cash dividend of Php898,000,000.00, out of the unrestricted retained earnings of ATC as of December 31, 2013 in favor of all stockholders of record as of December 31, 2013; and that the said dividend was paid to Mitsubishi on March 27, 2014 as evidenced by notarized Certificate of Remittance from the Bank of Tokyo-Mitsubishi UFJ dated April 3, 2014. It is further represented, per Secretary's Certificate dated January 7, 2014, that Mitsubishi is the stockholder on record of 407,326 common shares with a total par value of Php40,732,600.00, representing 5.29% of the outstanding shares of ATC since April 4, 2011. Finally, it is represented that the transaction subject of the herein request for ruling 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 Statement issued by ATC dated January 7, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies in general to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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 relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: " 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. 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. 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. 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 6 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. Considering that Mitsubishi , a resident of Japan with no place of business in the Philippines, owns only 5.29% of the outstanding shares in ATC, and that ATC's BOI Registration is not for a preferred area of investment, this Office is of the opinion and so holds that dividend paid by ATC to Mitsubishi is subject to income tax in the Philippines at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) 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