ITAD BIR Ruling No. 219-14

October 8, 2014 ITAD BIR RULING NO. 219-14 Article 10 Philippines-Japan tax treaty, as amended Hitachi Elevator Philippines Corporation 42 Montreal Street Cubao, Quezon City Attention: Mr. Renato F. Porras Assistant Finance Manager Gentlemen : This refers to your tax treaty relief application filed on June 9, 2011 requesting confirmation that dividends paid by Hitachi Elevator Philippines Corporation ("Hitachi Elevator") (formerly Hi Eles Industrial Corporation) to T. Chatani and Company Ltd. ("T. Chatani") are subject to income tax at the rate of 10 percent rate 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 by protocol. 1 Facts T. Chatani is a foreign corporation resident of Japan based on its Articles of Incorporation and Certificate of Residence issued by the Higashi Tax Office on July 8, 2011. It is located at Nomura Fudosan Osaka Building, 8-15, Azuchimachi 1-chome, Chuo-ku, Osaka, Japan. It 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 on August 22, 2011. On the other hand, Hitachi Elevator is a domestic corporation located at 42 Montreal Street, Cubao, Quezon City, Philippines. Based on Secretary's Certificate issued by Hitachi Elevator on October 5, 2011, Hitachi Elevator declared cash dividends on May 9, 2011 amounting P1,500,000.00 in favor of stockholders of record as of December 31, 2011. The dividends were paid on May 31, 2011. As of that date, T. Chatani owns 5 percent of Hitachi Elevator' s total shares of stock, equivalent to 10,998 shares or P1,099,800.00. CHcESa Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ( "Tax Code" ), income derived in the Philippines by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 30 percent, to wit: "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, such income is exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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. " DHECac With respect to a treaty, you invoke the amended Philippines-Japan tax treaty. Paragraphs 1 and 2, 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. " Under this article, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 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 for a period of six months immediately preceding the date of payment of the dividends; otherwise, the rate is 15 percent. CSaHDT Accordingly, since T. Chatani holds only 5 percent of the total shares of Hitachi Elevator as of the date of payment of the dividends on May 31, 2011, such dividends paid to T. Chatani by Hitachi Elevator are subject to income tax at the rate of 15 percent, pursuant to paragraph 2 (a), Article 10 of the amended Philippines-Japan tax treaty. 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 Footnotes 1. Protocol Amending 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 effective January 1, 2009. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.