ITAD BIR Ruling No. 189-15

June 3, 2015 ITAD BIR RULING NO. 189-15 Article 10 Philippines-Japan tax treaty, as amended Gammad Law Office 2nd Floor, L&F Building 107 Aguirre Street, Legaspi Village Makati City Attention: Atty. Joel C. Gammad Gentlemen : This refers to your tax treaty relief application filed on July 31, 2014 requesting confirmation that the dividends paid by Harbor Star Shipping Services, Inc. ("Harbor") to Daito Corporation ("Daito") are subject to a preferential tax rate of 15 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 a Protocol 1 ("Philippines-Japan tax treaty, as amended"). Facts Daito 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 Status of Taxable Person issued by the Shiba Tax Office in Japan on July 18, 2014. Based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 26, 2014, Daito is not registered as a corporation or partnership in the Philippines. On the other hand, Harbor is a domestic corporation in the Philippines. Based on the Secretary's Certificates issued on June 20, 2014 and July 28, 2014, the Board of Directors of Harbor , during a meeting on June 2, 2014, declared cash dividends amounting to P0.035 per share or an aggregate amount of P21,183,350.30 out of the corporation's unrestricted retained earnings of P309,241,858 for the year ending December 31, 2013 in favor of the company's stockholders of record as of June 17, 2014, and payable on July 11, 2014. As of July 25, 2014, Daito holds 27,416,000 common shares of stock with a total value of P46,607,200.00, which represent 4.53 percent of the total shares of stock issued and outstanding of Harbor . The shares were acquired by Daito from various dates beginning October 2013 to April 2014 through initial public offering and stock exchange facility. Finally, the dividend subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceeding, or judicial appeal, based on the Secretary's Certificate issued by the Corporate Secretary of Harbor on July 28, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are 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 dividends are 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "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 Article 10, dividends arising in the Philippines and paid to a resident of Japan 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 Daito does not hold directly at least 10 percent of the total shares of Harbor during a period of six months immediately preceding the date of payment of the dividends, where Daito actually holds 4.53 percent of these shares since April 21, 2014 , such dividend paid by Harbor to Daito is subject to income tax at the rate of 15 percent, pursuant to paragraph 2 (b), 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. 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.