ITAD BIR Ruling No. 198-15

June 5, 2015 ITAD BIR RULING NO. 198-15 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-77-11; BIR Ruling No. ITAD-59-11; BIR Ruling No. ITAD-35-10; BIR Ruling No. ITAD-07-10 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Malou P. Lim Partner, Tax Gentlemen : This refers to your tax treaty relief application filed on April 5, 2011, on behalf of NTT DoCoMo, Inc. ( "NTT" ), requesting confirmation that dividend payments made by Philippine Long Distance Corporation ( "PLDT" ) to NTT 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 "). aCIHcD It is represented that NTT, with address at 12-11-1, Nagata-cho, Chiyoda-ku, Tokyo, 100-6150, Japan, is a resident of the Japan per Certificate of Residence issued by the District Director of Kojimachi Tax Office on March 18, 2011; that NTT was licensed to establish its branch office in the Philippines on May 31, 2006 and to date no petition for the withdrawal or cancellation of its license has been filed as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on March 30, 2011; and that PLDT, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 9th Floor, PLDT-MGO Building, Legaspi Street corner Dela Rosa Street, Makati. Moreover, it is represented, per the Board Resolutions of the Board of Directors of PLDT dated March 1, 2011, that the Board declared the following: a) a regular dividend of Seventy Eight Pesos (P78.00) per outstanding share of common stock of PLDT, payable on April 19, 2011 to the holder of record as of March 16, 2010; and b) a special dividend of Sixty-six Pesos (P66.00) per outstanding share of common. stock of PLDT, payable on April 19, 2011 to the holder of record as of March 16, 2010; That per sworn certification issued by Citibank NA, Broker/Custodian of DBNA MLA OBO AC 7561260001 NTT, as of March 15/16, 2011 or record date and April 19/26 or payment date, NTT owns the following common shares in PLDT: Date of Mode of Number of Type of Shares Value of Shares % Issuance Acquisition Shares of Ownership July 8, 2008 Purchase 18,234,821 Common (held with PDTC) Php55,409,913,180.00 Feb. 12, 2008 Purchase 8,533,253 ADR (held with 14% Clearstream) Total shares 26,768,074 ========= It is further represented, per notarized certification issued by NTT-Phil. Branch , that the branch office is not a material factor in the realization of dividends paid by PLDT to the head office in Japan, and such dividends were not realized in the ordinary course of trade or business of the branch office and that the subject PLDT shares held by NTT were not used in, or held for use in, the conduct of trade or business of the branch office of NTT. cHaCAS It is finally represented, based on the Sworn Statement issued by PLDT on March 28, 2011, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. 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 . . . dividends, rents, royalties . . .: 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: DACcIH "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, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which reads: "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; HSCATc 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 months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. IDTSEH In the instant case, considering that NTT holds 26,768,074 common shares, which represent 14% of PLDT's total shares, this Office is of the opinion and so holds that the cash dividends paid by PLDT to NTT shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 35-10 dated September 14, 2010; BIR Ruling No. ITAD 07-10 dated May 20, 2010; BIR Ruling No. ITAD 077-11 dated March 11, 2011; BIR Ruling No. ITAD 59-11 dated February 22, 2011) Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents . (G.R. No. 76573 dated September 14, 1989), it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by PLDT to NTT shall be considered as income of NTT as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). SICDAa 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