ITAD BIR Ruling No. 171-14

September 18, 2014 ITAD BIR RULING NO. 171-14 Article 10, Philippines-Japan tax treaty, as amended Nonato & Nonato Law Offices Rm. 406 Tulips Center A.S. Fortuna St. Bakilid, Mandaue City, Cebu Attention: Atty. Rester John L. Nonato Legal Counsel Gentlemen : This refers to your tax treaty relief application filed on October 15, 2012, on behalf of Olympus Corporation ("Olympus") , requesting confirmation that the dividend paid to Olympus by Olypmus Optical Technology Philippines, Inc. ("OOTPI") is subject to 10 percent preferential tax rate pursuant to Article 10 (2) (b) of 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 Olympus , with address at 2-43-2, Hatagaya, Shibuya-ku, Tokyo, Japan, 151-0072, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Status of Taxable Person issued by the District Director of Hatagaya Tax Office on September 19, 2012; that Olympus 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 on September 17, 2012; that OOTPI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Mactan Economic Zone II, Lapu-lapu City Cebu; and that OOTPI is a Philippine Economic Zone Authority (PEZA)-registered enterprise under Certificate of Registration No. 01-067. It is further represented that on September 5, 2012, the Board of Directors of OOTPI approved a resolution to declare cash dividends in the amount of JPY800,000,000.00 to be taken out of the fiscal year ended March 31, 2012 retained earnings of OOTPI in favor of the stockholders of record as of March 31, 2012; that Olympus holds 239,842 common shares in OOTPI valued at Php23,984,200.00 representing 99.998% of the total subscribed shares in OOTPI; and that Olympus acquired the said shares in OOTPI through subscription of the shares on November 6, 2001; and that the dividend was remitted to Olympus on October 18, 2012 as evidenced by Certificate of Remittance from the Bank of Tokyo-Mitsubishi UFJ. EDaHAT 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 an Affidavit issued by OOTPI dated October 10, 2012. 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. CSAaDE xxx xxx xxx" In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It reads: "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. xxx xxx xxx 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 foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. ATcaHS Considering that Olympus owns 99.998% of OOTPI's shareholdings more than six (6) months immediately preceding the date of payment of cash dividend or since November 6, 2001, which is more than the 10 percent shareholding requirement of the total shares issued by OOTPI, the dividends paid by OOTPI to Olympus are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue