ITAD BIR Ruling No. 220-13

August 13, 2013 ITAD BIR RULING NO. 220-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Nonato & Nonato Law Offices Rm. 406 Tulips Center A.S. Fortuna Street, Bakilid Mandaue City, Cebu Attention: Atty. Rester John L. Nonato Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on February 15, 2012, requesting confirmation that the dividend paid by Olympus Optical Technology Philippines, Inc. ("Olympus-Phil") to Olympus Corporation ("Olympus-Japan") is subject to preferential rate of 10 percent pursuant to Article 10 (2) (a) 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") . IDATCE It is represented that Olympus-Japan ,with address at 2-43-2, Hatagaya, Shibuya-ku, Tokyo 151-0072, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Certificate of Status of Taxable Person issued on January 18, 2012 by the District Director of Shibuya Tax Office; 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 September 16, 2011; and that, on the other hand, Olympus-Phil is a corporation, organized and existing under the laws of the Philippines, with principal address at Mactan Economic Zone II, Lapulapu City, Cebu. It is further represented, that during the special meeting of the Board of Directors of Olympus-Phil held on October 28, 2011, the Board of Directors declared cash dividend in the amount of JPY300,000,000.00 to be taken out of the fiscal year ended March 31, 2011 retained earnings in favor of the stockholders of record as of March 31, 2011 who are the same stockholders as of the said declaration; that based on Secretary's Certificate issued by Olympus-Phil dated November 11, 2011, Olympus-Japan (including 5 shares of its nominees or trustees),owns 239,842 common shares valued at Php23,984,200.00 as of the date of declaration, representing 99.998% of the outstanding shares of the voting stock of Olympus-Phil; that these shares were acquired by subscription on November 6, 2001; and that, per the Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ-Manila branch, such dividend was remitted to Olympus-Japan on March 14, 2012. 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%)." cDAEIH 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; IASTDE b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 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." 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. In view thereof and considering that Olympus-Japan holds 99.998% of the outstanding shares of the voting stock of Olympus-Phil, and has maintained these shareholdings for more than six months immediately preceding the date of payment of the dividend since November 6, 2001, such dividend to be paid by Olympus-Phil to Olympus-Japan is subject to the preferential tax 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 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue