ITAD BIR Ruling No. 222-14

October 8, 2014 ITAD BIR RULING NO. 222-14 Article 10, Philippines-Japan tax treaty Kazuaki Takeuchi 5th Floor SMC-HOC, 40 San Miguel Avenue Mandaluyong City Gentlemen : This refers to your application for tax treaty relief application filed on June 5, 2013, requesting confirmation that the dividends to be paid by San Miguel Brewery, Inc. ("SMB") to Kirin Holdings Co., Ltd. ("Kirin") are subject to the preferential rate of 10 percent 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, as amended 1 ("Philippines-Japan tax treaty"). Facts It is represented that Kirin is a foreign corporation organized and existing under the laws of Japan with its principal office address at 10-2 Nakano 4-chome, Nakano-ku, Tokyo, Japan, based on its Residence Certificate issued by the District Director of Nakano Tax Office dated May 28, 2013; that Kirin is not registered as a corporation or as a partnership based on the Certification issued by the Securities and Exchange Commission on May 20, 2013; and that on the other hand, SMB is a domestic corporation situated at 40 San Miguel Avenue, Mandaluyong City. It is further represented that on May 9, 2013, the Board of Directors of SMB declared cash dividends of P0.14 per share paid on June 10, 2013 to all stockholders of record as of June 3, 2013, such amount of dividends will be taken out from unappropriated retained earnings; that Kirin holds 7,456,879,880 shares of stock since May 22, 2009 or 48.39% in SMB based on the Certification issued by the Corporate Secretary on June 11, 2013. 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, collection proceedings, or judicial appeal, based on the Certification issued by the Manager for Accounting and Financial Services of SMB on May 20, 2013. 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 Kirin, 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: HSaEAD "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. xxx xxx xxx" For this purpose, you invoke the Philippines-Japan tax treaty, as amended, provides as follows: "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. TaIHEA 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 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. HTcDEa Accordingly, considering that Kirin holds directly 48.39 percent of the total shares of stock of SMB during the period of six months immediately preceding the date of payment of the dividends or since May 22, 2009, such dividends paid by SMB to Kirin 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. 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.