ITAD BIR Ruling No. 181-14

September 18, 2014 ITAD BIR RULING NO. 181-14 Article 10, Philippines-Japan tax treaty, as amended Mitsuwa Philippines, Inc. Lot 4, 6 and 8, Block 22, Phase IV Cavite Economic Zone Rosario, Cavite Attention: Ms. Jocelyn N. Sanchez Deputy Factory Manager Gentlemen : This refers to your application for tax treaty relief filed on July 29, 2013 requesting confirmation that dividends paid by Mitsuwa Philippines, Inc. ("Mitsuwa Philippines") to Shonan Modeling Company Ltd. ("Shonan") are subject to income tax at the 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, as amended"). Shonan is a corporation organized and existing under the laws of Japan and is a resident thereof based on its Articles of Incorporation and Certificate of Residence issued by the Odawara Tax Office on July 11, 2013. Shonan is located at 519-19-5-609 Kowakudani, Hakone, Ashigarashimo, Kanagawa, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on July 26, 2013, Shonan is not a registered corporation or partnership in the Philippines. On the other hand, Mitsuwa Philippines is a domestic corporation situated at Lot 4, 6 and 8, Block 22, Phase IV, Cavite Economic Zone, Rosario, Cavite, Philippines. Based on the Corporate Secretary's Certificate issued on November 6, 2013, the Board of Directors of Mitsuwa Philippines (during its annual meeting on June 21, 2013) declared cash dividends amounting US$700,000.00 in favor of stockholders of record as of March 31, 2012. As of that date and since April 3, 1998, Shonan holds 25 percent of the outstanding shares of stock of Mitsuwa Philippines which the former acquired by original subscription. Based on the Sworn Statement issued by Mitsuwa Philippines on October 23, 2013, dividend amounting to US$157,500.00 was paid on July 30, 2013. SDHCac 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 in the Philippines by a foreign corporation not engaged in trade or business is 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%)." 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." SCEHaD For this purpose, paragraphs 1 and 2, Article 10 of the Philippines-Japan tax treaty, as amended, provides relief to dividends paid to resident of Japan, to wit: "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." Under this article, such dividends 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, and 15 percent in all other cases. Accordingly, since Shonan holds directly at least 10 percent of the total shares of Mitsuwa Philippines during a period of six months immediately preceding the date of payment of the dividends on July 30, 2013, where Shonan holds in fact 25 percent of these shares since April 3, 1998 , such dividends paid by Mitsuwa Philippines to Shonan are subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 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. TCcSDE 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.