ITAD BIR Ruling No. 216-14

October 8, 2014 ITAD BIR RULING NO. 216-14 Article 10 (Dividends) Philippines-Japan tax treaty, as amended Mitsubishi Corporation-Manila Branch 14F LV Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Mr. Kiyoshi Takagi Treasurer Gentlemen : This refers to your tax treaty application ("TTRA") filed on December 26, 2013, requesting confirmation that dividends paid by Ayala Corporation (Ayala) to Mitsubishi Logistics Corporation ("Mitsubishi") are subject to income tax at the rate of 15% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income ("Philippines-Japan tax treaty"), as amended by the 2009 Protocol. Mitsubishi is a foreign corporation organized and existing under the laws of Japan with business address and is a resident thereof within the meaning of the convention for the avoidance of double taxation between the Philippines and Japan with business address at 28-38, Shinkawa 1-Chome, Chuo-Ku, Tokyo, Japan. It is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on December 13, 2013. On the other hand, Ayala is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. It is represented that Mitsubishi is the registered owner of Three Hundred Sixty Thousand Five Hundred Twelve (360,512) common shares with par value of P50.00 per share constituting .0601% of the outstanding common shares of Ayala; that these shares were acquired on the following dates: Date of Issuance Mode of Acquisition Number of Shares 11/30/2005 Original Issuance 208,630 6/18/2007 Stock Dividend 41,726 5/21/2008 Stock Dividend 50,071 7/29/2011 Stock Dividend 60,085 Total 360,512 It is also represented that on December 5, 2013, Ayala, through its Board of Directors, declared a cash dividend of P2.40 per share to all outstanding common shares of the corporation as of record date December 19, 2013 and payable on January 3, 2014; that, per notarized certification issued by the Bank of the Philippine Islands dated January 23, 2014, Ayala paid Mitsubishi the amount of Six Hundred Five Thousand Six Hundred Sixty and 16/100 Pesos (P605,660.16). It is further represented, per sworn certification issued on December 20, 2013 by the Corporate Secretary of Ayala that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividend paid to Mitsubishi is subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." ECaTDc However, under Section 32 (B) (5) of the Tax Code, these 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." For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, & 3 of 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. aICHEc (3) Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends." Under paragraphs 2 and 3 of 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 (a) 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 during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, the dividend paid by Ayala to Mitsubishi is subject to income tax at the rate of fifteen percent (15%) of the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended because Mitsubishi only holds 360,512 common shares constituting .0601% which is less than ten percent (10%) of Ayala's total issued and outstanding shares during the period of six months immediately preceding the date of payment of the dividends. 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. IDAESH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.