ITAD BIR Ruling No. 208-11

August 12, 2011 ITAD BIR RULING NO. 208-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-128-11; BIR Ruling No. ITAD-076-11; BIR Ruling No. ITAD-007-11 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 Communications Corporation ("NTT") , requesting confirmation that dividend payments made by Philippine Long Distance Corporation ("PLDT") to NTT are subject to 15 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 NTT, with address at 1-1-6 Uchisaiwai-cho, Chiyoda-ku, Tokyo, 100-2019 Japan, is a resident of Japan within the meaning of Article 4 of the Philippines-Japan tax treaty per Certificate of Residence issued by the District Director of Kojimachi Tax Office on April 1, 2011; that NTT was licensed to establish its branch office in the Philippines ("NTT-Phil. Branch") on January 28, 2000 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 April 6, 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 Secretary's Certificate issued by PLDT on March 16, 2011, that the PLDT Board of Directors passed and approved a resolution during their March 1, 2011 meeting declaring the following cash dividends out of PLDT's audited unrestricted retained earnings as of December 31, 2010: a) Regular dividend of Seventy-Eight Pesos (P78.00) per outstanding share of PLDT's common stock, payable on April 19, 2011 to the holders of record as of March 16, 2010; and b) Special dividend of Sixty-six Pesos (P66.00) per outstanding share of PLDT's common stock, payable on April 19, 2011 to the holders of record as of March 16, 2010. That per certification issued by PLDT's Corporate Secretary on April 1, 2011, as of March 16, 2011, based on the records of PLDT's transfer agent, HongKong and Shanghai Banking Corporation, NTT owns the following common shares: ASEIDH Date of Mode of Number of Value of Shares Percentage of Issuance Acquisition Shares Ownership April 3, 2006 Purchase 12,633,486 P26,151,316,020.00 6.76468527% April 8, 2008 Purchase 6,601,335 P11,594,763,450.00 2.99927260% Total 19,234,821 9.76395787% ========= =========== 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. 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: "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; b) 15 per cent of the gross amount of the dividends in all other cases. EHTSCD 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 a 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 in all other cases. Considering that NTT holds 19,234,821 common shares, which represent 9.76395787% of PLDT's total shares which is less than 10 percent shareholding requirement of the total shares issued by that company, 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 15 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 076-11 dated March 10, 2011; BIR Ruling No. ITAD 077-11 dated January 19, 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 are 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. 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. IDaEHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue