ITAD BIR Ruling No. 197-11

July 21, 2011 ITAD BIR RULING NO. 197-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Toyota Motor Philippines Corporation Toyota Special Economic Zone Santa Rosa-Tagaytay Highway Santa Rosa City, Laguna 4026 Attention: Blesilda M. Rodriguez First Vice President Comptrollership Division Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on May 5, 2011, requesting confirmation that dividends to be paid by Toyota Motor Philippines Corporation ("Toyota-Phil") to Toyota Motor Corporation ("Toyota-Japan") are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) of 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 Toyota-Japan, with principal address at 1, Toyota-Cho, Toyota City, Aichi 471-8571, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty, as evidenced by a Certificate of Residence issued by the District Director of Toyota Tax Office on March 24, 2011; that it was licensed to establish its representative office in the Philippines on June 1, 1984, but such license was later cancelled on July 9, 1990 per Certification of Corporate Filing/Information issued by the Securities and Exchange Commission dated April 13, 2011; and that, on the other hand, Toyota-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Toyota Special Economic Zone, Santa Rosa Tagaytay Highway, Santa Rosa City, Laguna 4026. It is further represented that at the Organizational Meeting of the Board of Directors of Toyota-Phil held on April 12, 2011, a resolution has been passed and approved to declare a cash dividend in the amount of Three Billion Two Hundred Forty-Six Million Two Hundred Twenty-Nine Thousand Ten and 00/100 Pesos (PhP3,246,229,010.00), equivalent to 209.51% of its outstanding capital stock payable to all stockholders of record as of December 31, 2010; that based on the Secretary's Certificate issued by Toyota-Phil, since 1998 to 2010, Toyota-Japan owns 5,267,996 shares common stock representing 34% of the former's outstanding common stock; and that the subject dividends shall be paid on May 2011. DISaEA It is finally represented, per the Sworn Statement issued by Toyota-Phil dated May 4, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends received 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 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, 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." In relation to a treaty, paragraphs 1, 2 and 3, Article 10 of the Philippines-Japan tax treaty, as amended, read: "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. DTEcSa 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." Based on the aforeqouted 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 of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Toyota-Japan holds 34% ownership in Toyota-Phil, and that Toyota-Japan maintains this shareholding for at least six months immediately preceding the date of payment of the dividends on May, 2011, such dividends paid by Toyota-Phil to Toyota-Japan are subject to the preferential tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-11 dated January 28, 2011) 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