ITAD BIR Ruling No. 218-15

July 13, 2015 ITAD BIR RULING NO. 218-15 Article 10, Philippines-Japan tax treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on December 12, 2014, requesting confirmation that dividends paid by RIO TUBA NICKEL MINING CORPORATION (" Rio Tuba ") to SOJITZ CORPORATION (" Sojitz-Japan ") are subject to the preferential rate of 15 percent pursuant to Article 10 of 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 ("Philippines-Japan tax treaty, as amended") . It is represented that Sojitz-Japan , is a corporation organized and existing under the laws of Japan, and is a resident of Japan for tax purposes based on the Certificate of Residence issued by the District Director of Kojimachi Tax Office dated November 11, 2014; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 25, 2014; and that, on the other hand, Rio Tuba is a corporation organized and existing under the laws of the Philippines. It is further represented, that on November 7, 2014, at the special meeting of the Board of Directors of Rio Tuba , the Board of Directors of Rio Tuba declared cash dividends in the amount of Three Billion Five Hundred Million Pesos (Php3,500,000,000.00) to be taken out of its unrestricted retained earnings in favor of all the stockholders of record as of close of business on November 24, 2014; that as of November 24, 2014, Sojitz-Japan is the beneficial owner of 102,000 common shares of Rio Tuba constituting of 4% of the total outstanding capital stock of Rio Tuba since 2012. It is finally represented, based on certification issued by Sojitz Philippine Branch on November 19, 2014 that Sojitz Philippine Branch has no participation (direct or indirect) in the investments of Sojitz-Japan in Rio Tuba ; that it has no connection with the dividends to be received by Sojitz-Japan from Rio Tuba ; and the per Sworn Statement dated November 18, 2014 issued by Rio Tuba , that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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 interest, 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%)." CAIHTE However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: "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 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 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. xxx xxx xxx 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. 4. 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted 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 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. However, the preferential tax rates shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject dividend income is effectively connected to the said permanent establishment. Article five (5) of the Philippines-Japan tax treaty, as amended, defines "permanent establishment" as follows: DETACa Article 5 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx A perusal of the records shows that Sojitz-Japan has a branch here in the Philippines Sojitz Philippine Branch . As to whether the dividends paid by Rio Tuba to Sojitz-Japan is considered to have been made through a permanent establishment in the Philippines, the commentaries of the Organization for Economic Cooperation and Development ("OECD") Model Tax Convention on Income and on Capital 1 are relevant: ". . . the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but that are not attributable to the permanent establishment. This is a question on which there have historically been differences of view, a few countries having some time ago pursued a principle of general "force of attraction" according to which income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable by them if the beneficiary had a permanent establishment therein even though such income was clearly not attributable to that permanent establishment. Whilst some bilateral tax conventions include a limited anti-avoidance rule based on a restricted force of attraction approach that only applies to business profits derived from activities similar to those carried on by a permanent establishment, the general force of attraction approach described above has now been rejected in international tax treaty practice. The principle that is now generally accepted in double taxation conventions is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the tax authorities of that country should look at the separate sources of profit that the enterprise derives from their country and should apply to each permanent establishment test , subject to the possible application of other Articles of Convention. This solution allows simpler and more efficient tax administration and compliance, and is more closely adapted to the way in which business is commonly carried on. . . ." HEITAD Relative thereto, it was held by the Supreme Court in Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." In view thereof and considering that Sojitz Philippine Branch has no participation (direct or indirect) in the investments of Sojitz-Japan in Rio Tuba that it has no connection with the dividends to be received by Sojitz-Japan from Rio Tuba and that such dividends do not form part of the assets of Sojitz Philippine Branch such dividends are not effectively connected with Sojitz Philippine Branch . Moreover, since Sojitz-Japan , a resident of Japan with no fixed place of business in the Philippines, holds 4 percent ownership of the capital of Rio Tuba since 2012, such dividends paid by Rio Tuba to Sojitz-Japan are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), 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. aDSIHc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. OECD Model Tax Convention on Income and on Capital, Condensed Version, Eighth Edition, 2010, p. 157.