ITAD BIR Ruling No. 194-13

July 10, 2013 ITAD BIR RULING NO. 194-13 Article 10, Philippines-Japan tax treaty, as amended Cesar C. Cruz & Partners Law Offices 3001 Ayala Life-FGU Center 6811 Ayala Avenue Makati City Attention: Atty. Cesar C. Cruz Partner Gentlemen : This refers to your tax Treaty Relief Application ("TTRA") filed on June 10, 2011, on behalf of Fuji Machine Mfg., Ltd. ("Fuji Ltd.") , requesting confirmation that dividend payments made by Fuji Machine Philippines, Inc. ("Fuji, Inc.") to Fuji Ltd. 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 Fuji Ltd. , with address at 19 Chausuyama, Yamamachi, Chiryu, Aichi, Japan, is a resident of Japan under the provisions of the Philippines-Japan tax treaty per the Certificate of Status of Taxable Person issued by the District Director of Kariya Tax Office on May 19, 2011; that Fuji Ltd. is not registered 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 May 11, 2011; and that Fuji, Inc. , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at L1 B6 Panorama Property Bldg., 2 Calamba Premier International Park Calamba City, Laguna. It is also represented, per Corporate Secretary's Certificate issued by Fuji, Inc. dated May 13, 2011, that the Board of Directors of Fuji, Inc. passed and approved the declaration of cash dividends on May 6, 2011 amounting to Fifty-Eight Million Pesos (Php58,000,000.00) or Five Thousand Nine Hundred Thirty-Eight Pesos and Thirty-six Centavos (Php5,938.36) per share on the common stock of Fuji, Inc. payable to the stockholders of record as of close on business on May 15, 2011; that based on the records of Fuji, Inc., Fuji Ltd. owns 1,367 shares with a total par value of Php1,367,000.00 consisting of 14% ownership in Fuji, Inc. ; that Fuji Ltd. acquired said shares by original subscription on April 20, 2006 and October 17, 2006; and that payment of dividends were made by Fuji, Inc. to Fuji Ltd. in the amount of USD168,982.75 on June 15, 2011 per Bank Certification issued by RCBC on November 23, 2012. HADTEC 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 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): 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, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides that: cSTHaE "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. 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. HDTSIE Considering that Fuji Ltd. owns 14 percent shares in Fuji, Inc. which is more than the 10 percent shareholding requirement of the total shares issued by Fuji, Inc. for more than six (6) months immediately preceding the date of payment of cash dividend or since 2006, the dividends paid by Fuji, Inc. to Fuji Ltd. 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. 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