ITAD BIR Ruling No. 193-15

June 3, 2015 ITAD BIR RULING NO. 193-15 Article 10, Philippines-Japan tax treaty Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor. Gamboa Sts., Makati City Attention: Alfredo C. Lim Maria Regina A. Ruiz Authorized Representatives Gentlemen : This refers to your tax treaty relief application dated September 13, 2013 requesting for confirmation that dividends paid by Toyotsu Insurance Agency Phils., Inc. ("TIAPI Phil") to Toyota Tsusho Corporation ("TTC Japan") are subject to a preferential tax 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 a Protocol 1 ("Philippines-Japan tax treaty") . It is represented that TTC Japan is a foreign corporation organized and existing under the laws of Japan based on a Residence Certificate issued by the District Director of Nagoya Nakamura Tax Office dated July 11, 2013; that TTC Japan is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on May 16, 2013; and that on the other hand, TIAPI Phil is a domestic corporation organized and existing under Philippine laws. It is further represented that on September 4, 2013 the Board of Directors of TIAPI Phil declared cash dividends in the amount of Four Million Two Hundred Fifty Thousand Five Hundred Twenty Five & 60/100 Pesos (PhP4,250,525.60) out of the unrestricted retained earnings of the Corporation as of March 31, 2013, based on the Certificate issued by the Corporate Secretary of TIAPI Phil on September 4, 2013; that TTC Japan owns Sixty One Thousand One Hundred Twenty Four (61,124) shares of stock or 60% of the entire stockholdings of TIAPI Phil with a total par value of Six Million One Hundred Twelve Thousand Nine Hundred Pesos (PhP6,112,900.00) computed at One Hundred Pesos (PhP100.00) per share, acquired since October 4, 2006 based on the Certification issued by the Corporate Secretary of per share, acquired since October 4, 2006 based on the Certification issued by the Corporate Secretary of TIAPI Phil on September 4, 2013; and that based on the Certificate of Remittance, such dividends was remitted to TTC Japan on September 27, 2013. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Corporate Secretary of TIAPI Phil on September 4, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to TTC Japan, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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, . . .: 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 Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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 this particular case, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, 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. 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. xxx xxx xxx" Based on the aforequoted 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 for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that TTC Japan holds 60 percent of the total shares of TIAPI Phil during a period of six months immediately preceding the date of payment of the dividends or since October 4, 2006, this Office is of the opinion and so holds that such dividends paid by TIAPI Phil to TTC Japan are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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.