ITAD BIR Ruling No. 217-11

August 22, 2011 ITAD BIR RULING NO. 217-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 35-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 8-10; BIR Ruling No. ITAD 7-10 Fujitsu Die-Tech Corporation of the Philippines 113 East Science Avenue, Special Export Processing Zone Laguna Technopark, Bian, Laguna Attention: Mr. Ryuji Fukaguchi Assistant Vice-President/Treasurer Gentlemen : This refers to your letter/application dated September 28, 2010, on behalf of FUJITSU FRONTECH LIMITED (Fujitsu Frontech), requesting confirmation of your opinion that dividends received by Fujitsu Frontech from FUJITSU DIE-TECH CORPORATION OF THE PHILIPPINES (Fujitsu Die-Tech) 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 (hereinafter referred to as the "Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. Facts It is represented that Fujitsu Frontech, with office address at 1776 Yanokuchi, Inagi-shi, Tokyo, Japan, is a corporation duly organized and existing under the laws of Japan as evidenced by its Articles of Incorporation and by the Certificate issued by the Hino Tax Office in Japan on August 10, 2010; that Fujitsu Frontech is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 6, 2010; and that, on the other hand, Fujitsu Die-Tech is a corporation duly organized and existing under the laws of the Philippines, with business address at 113 East Science Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna, Philippines. EHaDIC It is further represented that on July 29, 2010, the Board of Directors of Fujitsu Die-Tech, at its organizational meeting, duly approved a resolution declaring cash dividends amounting to US$1,151,500.00 (or equivalent to US$0.47 per share), in favor of the stockholders of record of Fujitsu Die-Tech as of July 29, 2009, based on the Certificate on Adoption of Resolution issued by Corporate Secretary of Fujitsu Die-Tech on September 15, 2010; that the dividends will be taken out of the unappropriated retained earnings of Fujitsu Die-Tech amounting to US$2,832,480.00 as of March 31, 2010, and will be paid on or before March 31, 2011; that as of July 29, 2010, being the date of declaration of the dividends, Fujitsu Frontech holds the entire capital stock of Fujitsu Die-Tech amounting to Php245,000,000.00, divided into 2,450,000 all common shares with a par value of Php100.00 each, inclusive of the qualifying shares of the five nominee members of the Board of Directors of Fujitsu Die-Tech, based on the Certificate issued by the same Corporate Secretary on September 15, 2010. 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 Fujitsu Die-tech on September 15, 2010. Ruling In reply, please be informed that dividends derived by a nonresident foreign corporation are taxable generally under Section 28, (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, which provides: EAcIST "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, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such dividends may be exempt (or partially exempt) pursuant to a treaty obligation to which the Philippine government is bound. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: 1 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." With respect to a tax treaty, Article 10 of the Philippines-Japan tax treaty, as amended, provides: aESIHT "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." Under paragraph 2 above, the Philippines may tax dividends paid by a domestic company to a company resident of Japan at a rate not exceeding 10 percent of the gross amount thereof if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. Otherwise, a rate of 15 percent applies. cSIADH In view of the foregoing, considering that, as of July 29, 2010, being the date of declaration of the dividends in question, Fujitsu Frontech holds almost 100 percent of the total shares of Fujitsu Die-tech (which even exceeds the minimum percentage of 10 percent), and assuming that Fujitsu Frontech maintains this percentage of shareholdings (or below such percentage but at least equal to or more than 10 percent) for a period of six months prior to the dated of payment of the dividends on or before March 31, 2011, such dividends to be paid by Fujitsu Die-Tech to Fujitsu Frontech are subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2, Article 10 of the Philippines-Japan tax treaty, as amended. ( BIR Ruling No. ITAD-35-10 dated September 14, 2010, BIR Ruling No. ITAD-11-10 dated June 16, 2010, BIR Ruling No. ITAD-08-10 dated June 03, 2010; BIR Ruling No. ITAD 7-10 dated May 20, 2010 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. TITLE II TAX ON INCOME.