ITAD BIR Ruling No. 202-13

July 15, 2013 ITAD BIR RULING NO. 202-13 Article 10, Philippines-Japan tax treaty Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas corner Gamboa Street Makati City 12289 Attention: Maria Regina A. Ruiz Gentlemen : This refers to your Tax Treaty Relief Application dated October 2, 2012, on behalf of Toyota Tsusho Corporation ("TTC") , requesting confirmation of your opinion that dividends received by TTC from Toyota Insurance Agency Philippines, Inc. ("TIAPI") are subject to the 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 ("Philippines-Japan tax treaty"), as amended. 1 cHCSDa Facts It is represented that TTC 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, based on its Articles of Incorporation and on the Certificate of Residence issued by the Tax Authority of Japan; that TTC is situated in No. 9-8, Meieki 4-chome, Nakamura-ku, Nagoya, Japan; that TTC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission; and that, on the other hand, TIAPI is a corporation organized and existing under the laws of the Philippines with office address at 15/F One Global Place Bldg., 5th Avenue corner 25th Street, Bonifacio Global City, Taguig, Philippines. It is further represented that on September 24, 2012, the Board of Directors of TIAPI, duly approved a resolution declaring cash dividends amounting to P5,428,969.60 for all common stockholders of record as of September 24, 2012, payable on October 12, 2012; that as of September 24, 2012, TTC holds 61,124 shares in TIAPI representing 60% percent of the total issued and outstanding capital stock; and that these shares were acquired on October 4, 2006 through original issuance of TIAPI. It is further represented that based on the notarized certification dated November 16, 2012, issued by The Bank of Tokyo-Mitsubishi UFJ, Ltd. Tokyo, Japan, the dividend was remitted to TTC by TIAPI on October 12, 2012. It is finally represented that the dividends subject of the request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Certificate issued by TIAPI on September 24, 2012. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to TTC are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . EaCSTc 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, 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: "SEC. 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." 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. DCcIaE 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. 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 aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. In the instant case, considering that TTC holds 60 percent of the total outstanding capital stock of TIAPI since October 4, 2006 which is more than the period of six (6) months immediately preceding the date of payment of the cash dividend, this Office is of the opinion and so holds that the cash dividends paid by TIAPI to TTC shall be subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 10 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. aIAcCH 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 .