ITAD BIR Ruling No. 218-13

August 13, 2013 ITAD BIR RULING NO. 218-13 Article 10, Philippines-Japan tax treaty Diez Corporation 100 South Science Avenue Laguna Technopark Don Jose, Santa Rosa, Laguna Attention: Yukimi Muramatsu Vice President Gentlemen : This refers to your tax treaty relief application filed on July 27, 2012, requesting confirmation that dividends received by FUJITSU TEN LIMITED ("FTL") from DIEZ Corporation ("DIEZ") are subject to income tax of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . CcTIDH Facts It is represented that FTL is a foreign corporation 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 Hyogo Tax Office of Japan on June 8, 2012; that FTL is situated at 2-28 Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan; that FTL is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 16, 2012; and that, on the other hand, DIEZ is a domestic corporation situated at 100 South Science Avenue, Laguna Technopark, Don Jose, Santa Rosa, Laguna, Philippines. It is further represented that, based on the Certificate issued by the Corporate Secretary of DIEZ, a Board of Directors meeting of DIEZ was held last July 20, 2012, during the special meeting, it approved the declaration of dividends in favor of its stockholders amounting to Five Hundred Twenty Three Thousand Philippine Pesos (Php523,000.00) for the stockholder of record as of March 31, 2012, payable on July 20, 2012; that as of the date of dividend declaration, the following are the stockholdings of FTL to DIEZ: Number of shares Par Value Date Acquired Percentage of ownership 4,000 P100.00 November 15, 1990 40% _____________________ 116,000 P100.00 February 8, 1991 and that the dividend income was remitted to FTL by DIEZ last July 31, 2012, based on the notarized certification issued by Metropolitan Bank and Trust Company dated August 1, 2012. 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 Affidavit issued by the Vice-President of DIEZ dated July 25, 2012. CAETcH 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 FTL, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 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 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): 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 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: "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. SCaDAE xxx xxx xxx" In this connection, paragraphs 1, 2, 3 and 5, Article 10 of the Philippines-Japan tax treaty, as amended, 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." 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 thereof. CHDTEA Accordingly, considering that FTL holds directly 40 percent of the total shares of stock of DIEZ during the period of six months immediately preceding the date of payment of the dividends (in fact, since February 8, 1991),such dividends paid by DIEZ to FTL are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue