ITAD BIR Ruling No. 216-15

July 10, 2015 ITAD BIR RULING NO. 216-15 Article 10 (Dividends), Philippines-Japan tax treaty Nonato Nonato & Nonato Law Offices Rm 406, Tulips Center, A.S. Fortuna St., Bakilid, Mandaue City, Cebu Attention: Atty. Rester John L. Nonanto Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 03 April 2014 requesting confirmation that dividends paid by Philippine Makoto Corporation ("Makoto-Philippines") to Makoto Light Metal Co. Ltd. ("Makoto-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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 It is represented that Makoto-Japan is a non-resident foreign corporation organized and existing under the laws of Japan and is a company engaged in the business of processing and selling aluminium, copper, brass and other nonferrous materials, among others based on the notarized and consularized Certificate of Status of Taxable Person issued by the Asaka Tax Office of Japan and Articles of Incorporation of Makoto-Japan . The company Makoto-Japan 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 (SEC) on 01 April 2014. Makoto-Philippines , on the other hand, is a domestic corporation organized and existing under the Philippine laws registered with the Philippine Economic Zone Authority (PEZA). It is further represented that Makoto-Japan owns 100% of the authorized capital stock of Makoto-Philippines representing Seven Hundred Fifty Thousand (750,000) common shares and amounting to Seventy Five Million Pesos (Php75,000,000.00) at One Hundred Pesos (Php100.00) per share acquired by way of subscription on 29 September 1993 based on a notarized Secretary's Certificate from Makoto-Philippines. On 18 March 2014, Makoto-Philippines declared cash dividends in the total amount of Thirty Eight Million Yen (JP38,000,000.00) to be distributed among the stockholders of record as of 30 June 2013 payable on or before 31 December 2014 based on a notarized Board Resolution from Makoto-Philippines. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Statement from Makoto-Philippines. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Makoto-Japan are subject to income tax at the rate of 30 percent, thus: HSCATc "SEC. 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 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%)". 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 and 2 of Article 10 on Dividends thereof provide: "Article 10 Dividends 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 the 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. xxx xxx xxx 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 above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, and (b) 15% in all other cases. Considering that Makoto-Japan owns 100% or 750,000 common shares in Makoto-Philippines during the period of six (6) months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the dividends paid by Makoto-Philippines to Makoto-Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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. DaIAcC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending the PH-Japan tax treaty. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.