ITAD BIR Ruling No. 225-11

September 5, 2011 ITAD BIR RULING NO. 225-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-008-10 Nonato & Nonato Law Offices Room 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 filed on July 15, 2011, on behalf of Iwakami Company Ltd. ("Iwakami") , requesting confirmation that dividends paid to it by Cebu Iwakami Corporation ("Cebu Iwakami") are subject to a preferential tax 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 ("Philippines-Japan tax treaty") , as amended by a Protocol 1 effective January 1, 2009. aHESCT It is represented that Iwakami is a foreign corporation organized and existing under the laws of Japan based on its Articles of Association, as amended, and that it is a resident of Japan based on the Certification issued by the Katsushika Tax Office in Tokyo, Japan, on March 10, 2011; that Iwakami is situated at 2-4-9, Takara-machi, Katsushika-ku, Tokyo, Japan; that Iwakami 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 May 24, 2011; and that, on the other hand, Cebu Iwakami is a domestic corporation situated at 6th Street, Block B-6, Mactan Economic Zone I, Lapulapu City, Cebu, Philippines. It is further represented based on the Certificates issued by the Corporate Secretary of Cebu Iwakami on July 13 and 14, 2011, that the Board of Directors of Cebu Iwakami , at its meeting on July 11, 2011, declared cash dividends in the amount of Php10,298,980.00 in favor of the stockholders of record of Cebu Iwakami as of July 31, 2010; that the dividends will be paid in installments beginning October 2011, or after the necessary application for tax treaty relief is filed at the International Tax Affairs Division of the Bureau of Internal Revenue; and that since March 1, 2010, and up to date, Iwakami holds 181,020 common shares of stock of Cebu Iwakami , equivalent to Php18,102,000.00, which constitute 35.15 percent of the total shares of Cebu Iwakami . 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 Sworn Statement issued by the same Corporate Secretary on July 13, 2011. 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 Iwakami , 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: TaHDAS "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. TSDHCc xxx xxx xxx" With respect to a tax treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, and 3, 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. 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 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines 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 dividends 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; (b) 10 percent of the gross amount of the dividends if the company paying the dividends is registered with the Board of Investments and engaged in preferred areas of activities under the investment incentives laws of the Philippines; and (c) 15 percent of the gross amount of the dividends in all other cases. cAEDTa Accordingly, considering that Iwakami holds directly at least 10 percent (in fact, 35.15 percent) of the total shares of stock of Cebu Iwakami during the period of six months immediately preceding the date of payment of the dividends (in fact, since March 1, 2010, up to present), such dividends paid by Cebu Iwakami to Iwakami 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, as amended. (BIR Ruling No. ITAD 008-10 dated June 3, 2010) 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.