ITAD BIR Ruling No. 192-14

September 18, 2014 ITAD BIR RULING NO. 192-14 Article 10, Philippines-Japan tax treaty, as amended Diez Corporation 100 South Science Avenue Don Jose Sta. Rosa, Laguna Attention: Yukimi Muramatsu Vice President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 16, 2011 requesting confirmation that the dividends paid by DIEZ Corporation ("DIEZ") to Fujitsu Ten Limited ("Fujitsu") are subject to the preferential tax 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 1 ("Philippines-Japan tax treaty, as amended"). It is represented that Fujitsu is a foreign corporation organized and existing under the laws of Japan, and is a resident of Japan for tax purposes, with principal office at 2-28, Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan based on the Certificate of Residence issued by the District Director of Hyogo Tax Office dated May 30, 2011; that Fujitsu is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 10, 2011; and that, on the other hand, DIEZ is a corporation duly organized and existing under the laws of the Philippines with office address at 100 South Science Avenue, Don Jose Sta. Rosa, Laguna, Philippines. It is further represented that on July 22, 2011 the Board of Directors of DIEZ approved a resolution which declared cash dividends in the amount of Php686,010.00 out of the unappropriated retained earnings of DIEZ as of March 31, 2011 in favor of its stockholders of record as of March 31, 2011, payable on or before August 19, 2011; that Fujitsu holds 120,000 common shares constituting 40 percent of the total subscribed and paid up capital stock of DIEZ acquired in 1990 (4,000 shares) and in 1991 (116,000 shares) per Secretary's Certificate issued by the Corporate Secretary of DIEZ dated August 16, 2011. aSDCIE It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Vice President of DIEZ dated August 16, 2011. 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%). . . ." 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. aCcEHS xxx xxx xxx" Hence, 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. 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. IHTaCE 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 Fujitsu holds directly 40 percent of the total shares of stock of DIEZ during the period of six months immediately preceding the date of payment of the dividends, such dividends paid by DIEZ to Fujitsu are subject to income tax at the 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 Footnotes 1. The Amending Protocol took effect on January 1, 2009.