ITAD BIR Ruling No. 225-15

July 15, 2015 ITAD BIR RULING NO. 225-15 Article 10, Philippines-Japan tax treaty, as amended Nonato & Nonato Law Offices Room 405 Tulips Center, A.S. Fortuna St., Mandaue City, Cebu Attention: Atty. Rester John Nonato Authorized Representative Gentlemen : This refers to your appeal filed with the Office of the President on behalf of your client, TAP CO. LTD. ("TCL") from the Decision of the Secretary of Finance dated August 3, 2012, reiterating his earlier Decision dated May 25, 2012 which affirmed the Bureau of Internal Revenue ITAD Ruling No. 069-12 dated February 16, 2012. ITAD Ruling No. 069-12 denied the tax treaty relief application (TTRA) filed by TCL requesting for confirmation that dividends received from TAP Impex(P), Inc. ("TIPI") are subject to the preferential tax rate of 10 percent of the gross amount thereof, 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 by a Protocol 1 ("Philippines-Japan tax treaty") . The request was denied for having been filed beyond the 15-day period prescribed by Revenue Memorandum Order No. 1-2000. The Office of the President remanded the case to this Office for re-assessment or re-evaluation of the TTRA filed by TCL. HESIcT It is represented that TCL is a foreign corporation organized and existing under the laws of Japan with office address at 7-2-30 Yoshida, Higashiosaka City, Osaka, Japan, per Residence Certificate dated June 29, 2010 issued by the District Director of Higashiosaka Tax Office; that TCL is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated July 7, 2010; that, on the other hand, TIPI is a domestic corporation, registered with the Philippine Economic Zone Authority as an ecozone facilities enterprise under Certificate of Registration No. 97-001F dated January 21, 1997; and that TIPI's principal office address is at Mactan Ecozone I, Lapulapu City, Cebu. It is also represented that TIPI is a wholly-owned corporation of TCL, the latter thereby owning 100% of the outstanding shares of the voting stock of TIPI, per Secretary's Certificate dated July 22, 2010 and supported by TIPI's General Information Sheet for the year 2009; that at the meeting of the Board of Directors of TIPI held on July 1, 2010, it was resolved that a cash dividend amounting to Php2,000,000.00 be paid on July 26, 2010 to all stockholders of record as of March 31, 2010; and that, the dividends subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Notably, 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 . . ., dividends, . . .: 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 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" In this particular case, the treaty involved is the Philippines-Japan tax treaty, as amended, which, in its Article 10, provides: caITAC "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. xxx xxx xxx" Upon re-evaluation, since TCL owns 99.99% of the outstanding shares of the voting stock of TIPI, the paying corporation, during the period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends to be remitted by TIPI to TCL are subject to the preferential rate of 10 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. This ruling supersedes BIR ITAD Ruling No. 069-12 dated February 16, 2012 . 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 effective January 1, 2009.