ITAD BIR Ruling No. 199-13

July 12, 2013 ITAD BIR RULING NO. 199-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Kawasaki Motors (Phils.) Corporation Km. 24 East Service Road Cupang, Muntinlupa City Attention: Alvin P. Oandasan GM-Finance and Accounting Gentlemen : This refers your Tax Treaty Relief Application ("TTRA") filed on July 1, 2011, requesting confirmation that the dividends paid by Kawasaki Motors (Phils.) Corporation ("Kawasaki") to SIIX Corporation ("SIIX") are subject to 10 percent preferential tax rate, pursuant to Article 10 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 SIIX, with address at 1-4-9, Bingo-machi, chou-ku, Osaka 541-0051, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per the Certification by the Tax Authorities of the Country of Residence issued by the District Director of Higashi Tax Office dated June 17, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 3, 2011; and that, on the other hand, Kawasaki is a corporation organized and existing under the laws of the Philippines, with principal address at Km. 24 East Service Road, Cupang, Muntinlupa City. It is further represented that during the special meeting of the Board of Directors of Kawasaki which was held on April 14, 2011, a resolution was unanimously adopted and approved declaring cash dividend in the amount of P185,000,000.00 out of Kawasaki 's retained earnings as of December 31, 2010 in favor of all stockholders of record as of April 14, 2011 payable as follows: (a) First payment : 50% or P92,500,000.00 on or before June 30, 2011 (b) Second payment : 50% or 92,500,000.00 on or before December 31, 2011; that per the Corporate Secretary's Certificate issued by Kawasaki dated October 12, 2011, SIIX acquired 20,349,390 common shares on June 1, 1999 in Kawasaki valued at Php1.00 per share or a total value of Php20,349,390.00, which is 20% of Kawasaki 's outstanding capital stock; and that, based on a Telegraphic Transfer Application Form issued by Security Bank Corporation-Alabang Branch, dividend payment were made by Kawasaki to SIIX on June 29, 2011 and December 22, 2011 , respectively. ICHAaT It is finally represented, per Sworn Statement dated May 12, 2011 issued by Kawasaki , 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. 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 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 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: DISaEA "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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: "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 percent 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. HTSaEC 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." 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 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 SIIX holds 20 percent of the outstanding capital stock in Kawasaki , and that SIIX has maintained these shareholdings for more than six months from the date of payment of the dividends or since June 1, 1999, such dividends paid by Kawasaki to SIIX are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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. ITHADC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue