ITAD BIR Ruling No. 220-15

July 13, 2015 ITAD BIR RULING NO. 220-15 Article 10 (Dividends), Philippines-Japan tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: Fabian K. de los Santos Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 17 March 2014 requesting confirmation that dividends paid by Hankyu Hanshin Express Philippines, Inc. ("Hankyu-Philippines") to Hankyu Hanshin Express Co. Ltd. ("Hankyu-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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. 1 It is represented that Hankyu-Japan is a non-resident foreign corporation organized and existing under the laws of Japan and is a company engaged in the business of forwarding of sales agent for airlines, shipping companies, railroad companies, streetcar lines and other carriers using other means of transportation in Japan and overseas, among others based on the notarized and consularized Certificate of Status of Taxable Person issued by the Kita Tax Office of Japan and Articles of Incorporation of Hankyu-Japan . The company Hankyu-Japan 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 (SEC) on 13 February 2014. Hankyu-Philippines , on the other hand, is a domestic corporation organized and existing under the Philippine laws. It is further represented that Hankyu-Japan owns 119,994 shares representing 40% of the authorized capital stock of Hankyu-Philippines amounting to Eleven Million Nine Hundred Ninety Nine Thousand Four Hundred Pesos (Php11,990,400.00) n since 01 July 2002 by way of purchase on several dates based on a notarized Certification from Hankyu-Philippines . On 15 January 2014, Hankyu-Philippines declared cash dividends in the total amount of Nine Million Two Hundred Thirty Thousand Eight Hundred Forty Pesos and Twelve Centavos (Php9,230,840.12) to be distributed among the stockholders of record as of 31 December 2013 based on a notarized Certification from Hankyu-Philippines . It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the Certificate of No Pending Case from Hankyu-Philippines . In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Hankyu-Japan are subject to income tax at the rate of 30 percent, thus: "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, these 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: "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." For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: HEITAD "Article 10 Dividends 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 the 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. xxx xxx xxx 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 above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, and (b) 15% in all other cases. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. Protocol Amending the PH-Japan tax treaty. n Note from the Publisher: Discrepancy between amount in words and in figures. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.