ITAD BIR Ruling No. 227-14

October 8, 2014 ITAD BIR RULING NO. 227-14 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Nonato & Nonato Law Offices Rm 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 December 14, 2012, on behalf of Maruemu Diecast Co., Ltd. ("Maruemu") requesting confirmation that the dividends received from Makoto Metal Technology, Inc. ("Makoto") by Maruemu are subject to 10 percent withholding tax pursuant to Article 10 of 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 Maruemu , with principal address at 3-13-56 Kamimuneoka Shiki City Saitama, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Certification by the Tax Authorities of the Country of Residence issued by the District Director of Asaka Tax Office on October 12, 2012; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 20, 2012; and that, on the other hand, Makoto is a corporation organized and existing under the laws of the Philippines, registered with the Philippine Economic Zone Authority ("PEZA") under Certificate of Registration No. 00-015 issued on February 23, 2000, with principal address at Phase 1, Lots 4 A & B, Block 5, Mepz II, Basak, Lapulapu City, Cebu. ADaSET It is further represented that at the special meeting of the Board of Directors of Makoto held on December 12, 2012, a resolution was passed and approved by the Board of Directors of Makoto to declare cash dividends in the amount equivalent to JPY40,000,000.00 to be taken out of the fiscal year ended September 30, 2012 unrestricted retained earnings in favor of the stockholders of record as of September 30, 2011; that based on the Secretary's Certificate issued by Makoto dated December 12, 2012, Maruemu owns 116,995 common shares with a par value of Php11,699,500 which constitute 89.99% of the outstanding shares and voting stock of Makoto; that said shares were acquired by Maruemu by subscription on February 15, 2000; and that, based on the Bank Certification of RCBC dated December 21, 2012, Makoto remitted to Maruemu such dividends on December 18, 2012. It is finally represented, per the Sworn Statement issued by Makoto dated December 12, 2012, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." LibLex However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (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. . . ." Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. It provides: "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: DAEICc 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. xxx xxx xxx 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a 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 of 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. In view thereof and considering that Maruemu, a resident of Japan with no fixed place of business in the Philippines, holds directly 89.99% of the outstanding shares and voting stock of Makoto for a period of 6 months immediately preceding the date of payment of the dividends or since February 15, 2000, said dividends are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. HaIESC 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