ITAD BIR Ruling No. 174-11

June 22, 2011 ITAD BIR RULING NO. 174-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-07-10; BIR Ruling No. ITAD-08-10; BIR Ruling No. ITAD-11-10; BIR Ruling No. ITAD-35-10 Nonato & Nonato Law Offices Rm. 406 Tulips Center, A.S. Fortuna St. Bakilid, Mandaue City Cebu Attention: Atty. Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application filed on March 23, 2011, on behalf of Maruemu Diecast Co. Ltd. ("Maruemu") , requesting confirmation that dividend payments made by Makoto Metal Technology, Inc. ("Makoto") to Maruemu are 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 Maruemu , with address at 3-13-56 Kamimuneoka Shiki-shi, Saitama, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan with Tax ID No. 00602655 per Residence Certificate issued by the District Director of Asaka Tax Office on March 15, 2011; that Maruemu 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 March 22, 2011; and that Makoto , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Phase 1, Lot 4 A & B, Block 5, MEPZ II, Basak, Mactan Ecozone I, Lapulapu City, Cebu, Philippines. Moreover, it is represented, per the Resolution of the Board of Directors of Makoto dated March 11, 2011, that during their special meeting on March 11, 2011, the Board declared cash dividends in the amount equivalent to JP50,000,000.00 to be taken out of the accumulated unrestricted retained earnings or surplus profit of Makoto as of fiscal year ended September 30, 2010 in favor of the stockholders of record as of September 30, 2010; that the said dividends shall be paid on April 29, 2011; that per certification issued by Makoto's Corporate Secretary on March 21, 2011, as of the date of declaration of dividends on March 11, 2011, Maruemu owns 116,955 common shares with par value of Php11,699,500 which constitute 89.99% shares in Mokoto valued at Php11,699,500.00; that the stockholders of Makoto as of September 30, 2010 and as of March 11, 2011 are the same; and that Maruemu acquired the said shares in Makoto by subscription on February 15, 2000. SaIHDA It is finally represented, based on the Sworn Statement by the same Corporate Secretary on March 21, 2011, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. 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, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which 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. SCIAaT 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. Considering that during the period of six (6) months immediately preceding the date of payment of cash dividend, Maruemu owns 89.99% shares in Makoto , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, the dividends paid by Makoto to Maruemu 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 (BIR Ruling No. ITAD 35-10 dated September 14, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. ITAD 8-10 dated June 3, 2010; BIR Ruling No. ITAD 7-10 dated May 20, 2010) 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