ITAD BIR Ruling No. 223-12

May 31, 2012 ITAD BIR RULING NO. 223-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 ABC Legal 2nd Floor Building B, Mactan Marina Mall Ibo, Lapulapu City 6015 Cebu, Philippines Attention: Lauris L. dela Pea Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 14, 2011 requesting confirmation that the dividends paid by Tsuneishi Holdings (Cebu) Inc. ("Tsuneishi Philippines") to Tsuneishi Holdings Corporation ("Tsuneishi") are subject to the preferential rate of 10 percent pursuant to 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 Tsuneishi is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan within the meaning of the Philippines-Japan tax treaty, with principal office at 1083 Tsuneishi, Numakuma-cho, Fukuyama-city, Hiroshima, Japan, based on the Certificate of status of Taxable person issued by the District Director of Fukuyama Tax Office dated August 8, 2011; that Tsuneishi is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation issued by the Securities and Exchange Commission dated July 14, 2011; that, on the other hand, Tsuneishi Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at West Cebu Industrial Park-Special Economic Zone, Buanoy, Balamban, Cebu, Philippines; and that Tsuneishi holds 813,046,872 shares constituting 99.99 percent of the issued and outstanding shares of Tsuneishi Philippines acquired on various dates starting August 25, 1993 up to March 29, 2010. It is further represented that on September 1, 2011 the Board of Directors of Tsuneishi Philippines declared cash dividends in the amount of Four Hundred Seventy-Seven Million Pesos (Php477,000,000.00) out of its accumulated and unrestricted retained n as of December 31, 2010, payable to all stockholders of record of Tsuneishi Philippines as of June 30, 2011, payable on or before September 20, 2011; and as proof of actual payment of the said dividends, a Bank Certification issued by Rizal Commercial Banking Corporation was submitted attesting that on September 19, 2011, an amount of Seven Hundred Fifty-Six Million Four Hundred Seventy-Five Thousand Seven Hundred Seventy-One Japanese Yen (JPY756,475,771.00) was remitted by the bank to Japan in favor of Tsuneishi by order of Tsuneishi Philippines. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "Section 28. Rates of Income Tax on Foreign Corporations. IaAHCE 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%). xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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" Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "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 that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 percent 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 percent 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. 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 percent of the gross amount of the dividends. aEDCSI 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. xxx xxx xxx" 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 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, during the period of six months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15 percent in all other cases. Accordingly, since Tsuneishi holds directly 99.99 percent of the total shares of stock of Tsuneishi Philippines during the period of six months immediately preceding the date of payment of the dividends, such dividends paid by Tsuneishi Philippines to Tsuneishi are subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling ITAD 007-10 dated May 20, 2010.) 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 n Note from the Publisher: Copied verbatim from the official copy. The phrase "unrestricted retained" should read as "unrestricted retained earnings".