ITAD BIR Ruling No. 173-12

April 24, 2012 ITAD BIR RULING NO. 173-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 SGV & Co. 6750 Ayala Avenue 1226 Makati City Philippines Attention: Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 29, 2011 requesting confirmation that the dividends paid by Kubota Agro-Industrial Philippines, Inc. ("Kubota") to Marubeni Corporation ("Marubeni") are subject to the preferential tax treaty rate of 10 percent 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 Marubeni , with principal office at 4-2, Ohtemachi 1-Chome, Chiyoda-ku, Tokyo 100-8088, Japan, is a corporation duly organized and existing under the laws of Japan and is a resident thereof based on the Certificate issued by the District Director of Kojimachi Tax Office dated June 24, 2011; that Marubeni was issued a license to do business in the Philippines on March 20, 1967 and to date, no petition for the withdrawal or cancellation of license has been filed per Certificate of Corporate Filing/Information issued by the Philippine Securities and Exchange Commission dated September 28, 2011; and that, on the other hand, Kubota is a corporation duly organized and existing under the laws of the Philippines with office address at 155 Panay Avenue South Triangle, Quezon City, Philippines. It is also represented per Certification dated September 14, 2011 executed by Kazunobu Takijima, General Manager of Marubeni Manila Branch in the Philippines that Marubeni Manila Branch has no relation, participation or intervention directly or indirectly, whatsoever, in respect to the acquisition/subscription of Marubeni of shares of stock in Kubota ; that the said shares of stock and subscription were acquired by Marubeni directly and independently from its branch office in the Philippines. It is further represented that on May 14, 2011, the Board of Directors of Kubota approved the declaration of cash dividends equivalent to a total of Php0.735 per share as regular cash dividend to stockholders of record as of May 25, 2011 payable on September 30, 2011 ; that Marubeni holds 15,000,000 shares constituting 15 percent of the issued and outstanding shares of Kubota ; that Marubeni acquired its shares from Kubota on various dates from year 1988 up to year 1994 per Certification issued by the Corporate Secretary of Kubota on September 28, 2011. It is also represented that the issue or transaction subject of this TTRA is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per the sworn statement of the Treasurer/AVP Finance Officer of Kubota dated June 15, 2011. IETCAS Finally, a copy of bank telegraphic transfer notification shows that on September 30, 2011, upon the order of Kubota , cash dividend in the amount of US$225,767.92 was sent to the account of Marubeni in Mizuho Corporate Bank, with the Security Bank, Manila as the Sender, and, Wells Fargo Bank, New York as the Receiver. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, provides, as follows: "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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax or partially exempt, if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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" Hence, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "Article 10 DIVIDENDS 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. HICSTa 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. 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 six 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. Accordingly, since Marubeni holds directly 15 percent of the total shares of stock of Kubota from year 1988 up to the present, such dividends paid by Kubota to Marubeni are subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling ITAD 007-10 dated May 20, 2010) 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