ITAD BIR Ruling No. 229-15

July 21, 2015 ITAD BIR RULING NO. 229-15 Article 10, Philippines-Japan tax treaty FHP Corporation 120 North Science Avenue Laguna Technopark, Special Export Zone Bian, Laguna Attention: Mr. Benito N. De Leon President Gentlemen : This refers to your tax treaty relief application filed dated October 19, 2012, requesting confirmation that dividends received by Futaba Corporation-Japan ("Futaba Japan") from FHP Corporation are subject to income tax of 10 percent preferential rate 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 Facts It is represented that Futaba Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Mobara Tax Office of Japan on July 11, 2012; that Futaba Japan is situated at No. 629 Oshiba Mabara-shi, chiba-ken, 2978588, Japan; that Futaba Japan is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 10, 2012; and that, on the other hand, FHP Corporation is a domestic corporation situated at 120 North Science Avenue, Laguna Technopark, Special Export Zone, Bian, Laguna, Philippines. It is further represented that, on October 18, 2012, the Board of Directors of FHP Corporation declare cash dividends amounting to P3,500,000.00 all common stockholders of records as of July 2, 2012, in proportion to their respective stockholdings as of such date payable on or before September 30, 2012; that as of July 2, 2013, 2009 Futaba Corporation confirms Futaba Japan stockholdings as follows: CAIHTE Type of Shares Number Par Value Mode of Date of Percentage of of Shares Acquisition Acquisition Ownership Common 34,998 P1,000.00 Subscription Oct. 5, 2009 39.998% It is finally represented that the dividends subject of the above application 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 Affidavit issued by the President of FHP Corporation dated October 8, 2012. 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 FHP Corporation , 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: "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, which 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. 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: DETACa 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. Accordingly, considering that Futaba Japan holds directly 39.998 percent of the total shares of stock of FHP Corporation during the period of six months immediately preceding the date of payment of the dividends (since October 5, 2009), such dividends paid by FHP Corporation to Futaba Japan 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. 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.