ITAD BIR Ruling No. 214-15

July 10, 2015 ITAD BIR RULING NO. 214-15 Article 10, Philippines-Japan tax treaty Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St. Salcedo Village, Makati City 1227 Attention: Atty. Maria Victoria D. Sarmiento Atty. Maritess C. Sy Gentlemen : This refers to your tax treaty relief application filed on March 27, 2014 on behalf of JAPAN ENVIROCHEMICALS, LTD. ("JEC"), requesting confirmation that dividend payments made to JEC by DAVAO CENTRAL CHEMICAL CORPORATION ("DCCC") are subject to the preferential tax rate of 10 percent 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended"). AHDacC Facts It is represented that JEC is a corporation duly organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Nishi Tax Office on January 6, 2014; that JEC is engage in the business of research, development, manufacturing, import-export, purchase, and sale of activated carbon, wood preservatives, industrial preservatives, water treatment carriers, environmental pollutant test kits, phosphorus absorbent, and any and all businesses relating or incidental to each of the foregoing as provided for in its Articles of Incorporation; that JEC is not registered either as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on March 20, 2014; and that, on the other hand, DCCC is a corporation duly organized and existing under Philippine laws. On March 27, 2014, as shown in the Secretary's Certificate issued by the Corporate Secretary, during the special meeting of the Board of Directors of DCCC, authorized and approved the declaration of cash dividend amounting to P15,170,400.00 out of the unrestricted retained earnings of DCCC, as of December 31, 2013, payable to stockholders on record as of March 31, 2014; that following are the stockholding of JEC common share to DCCC: Subscribed Mode of Acquisition Acquisition Date Percentage number of Shares of Ownership 2,352,000 Acquired through sale from December 29, 2005 80% Osaka Gas Chemicals Co., Ltd. by way of sale on December 29, 2005 at the total selling rice of P81,594,000.00 It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by DCCC dated March 25, 2014. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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, . . .: 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 provides that 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: IDSEAH "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 this particular case, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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. HCaDIS xxx xxx xxx" Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Accordingly, since JEC holds directly at least 10 percent of the total shares of DCCC during a period of six months immediately preceding the date of payment of the dividends, where JEC actually holds 80 percent of these shares since December 29, 2005, such dividends paid by DCCC to JEC are subject to income tax at the rate of 10 percent, 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. aCIHcD 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.