ITAD BIR Ruling No. 231-13

August 15, 2013 ITAD BIR RULING NO. 231-13 Article 10, Philippines-Japan Tax Treaty Cesar C. Cruz & Partners Law Offices 3001 Ayala Life-FGU Center 6811 Ayala Avenue, Makati City, Metro Manila 1227 Attention: Mr. Cesar C. Cruz Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 26 December 2012 ,on behalf of your client, Sojitz Corporation ("Sojitz") ,requesting confirmation that dividends paid by Sojitz Philippines Corporation ("Sojitz PH") to Sojitz ,are subject to the preferential tax rate of 10 percent (10%) pursuant to Article 10 (2) (a) of 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") . 2 SIEHcA It is represented that Sojitz is a corporation organized and existing under the laws of Japan and is a resident thereof, with principal office address at 1-1, Uchisaiwaicho 2-chome, Chiyoda-ku, Tokyo, Japan, as evidenced by the Certificate of Residence dated 06 December 2012, as authenticated by the Consul of the Republic of the Philippines in and for Tokyo, Japan dated 17 December 2012; that Sojitz 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 dated 09 July 2012, the registered company name to said entity is Sojitz Corporation Philippine Branch ("SCPB") ;and that, on the other hand, Sojitz PH is a corporation organized and existing under the laws of the Philippines with principal address at 24F Pacific Star Bldg.,Sen. Gil J. Puyat cor. Makati Ave.,Makati 1209. It is further represented, as certified by the Corporate Secretary of Sojitz PH, executed on 23 April 2012, that at a special meeting held on 13 April 2012, the Board of Directors of Sojitz PH declared cash dividends equivalent to Two Million Four Hundred Thousand Pesos (Php2,400,000.00);and that since 07 January 2005, Sojitz ,holds 31,997 shares of stock of Sojitz PH, or equivalent to 40% of its total shares. It is further represented that SCPB is not privy and does not have any participation whatsoever in the holding of Sojitz 's shares of stocks in Sojitz PH, as evidenced by a certification executed by the Corporate Secretary of Sojitz PH on 30 May 2013. It is further represented that the payment of the subject dividends were made by Sojitz PH through Rizal Commercial Banking Corporation ("RCBC") in the amount of Twenty One Thousand Three Hundred Fifty Nine and 70/100 United States Dollars (USD21,359.70) on 28 December 2012 per bank certification issued by RCBC on 15 January 2013. It is finally represented that the dividends subject of this TTRA 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 Certification issued by the Corporate Secretary of Sojitz PH executed on 20 December 2012. EICSDT Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, dividends paid to Sojitz are subject to income tax at the rate of 30 percent, thus: "SEC. 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 percent (30%) 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) and (d) above." n However, under Section 32 (B) (5) of the Tax Code, 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: "SEC. 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." IAcTaC With respect to a treaty, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of 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." Based on the foregoing, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends if the company recipient of the dividends 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. However, the preferential tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. Article five (5) of the Philippines-Japan tax treaty, as amended, defines "permanent establishment" as: ECDaTI "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx" As culled from the records, Sojitz has a branch here in the Philippines SCPB. Whether the dividends paid by Sojitz PH to Sojitz is considered to have been made through a permanent establishment here in the Philippines, the relevant commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital 3 provide: aEcHCD "... the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but that are not attributable to the permanent establishment. This is a question on which there have historically been differences of view, a few countries having some time ago pursued a principle of general "force of attraction" according to which income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable by them if the beneficiary had a permanent establishment therein even though such income was clearly not attributable to that permanent establishment. Whilst some bilateral tax conventions include a limited anti-avoidance rule based on a restricted force of attraction approach that only applies to business profits derived from activities similar to those carried on by a permanent establishment, the general force of attraction approach described above has now been rejected in international tax treaty practice. The principle that is now generally accepted in double taxation conventions is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the tax authorities of that country should look at the separate sources of profit that the enterprise derives from their country and should apply to each the permanent establishment test, subject to the possible application of other Articles of Convention. This solution allows simpler and more efficient tax administration and compliance, and is more closely adapted to the way in which business is commonly carried on ...." (emphasis ours) In the same vein, the Supreme Court in the case of Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals 4 held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch .Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) AEDISC Hence, based on the foregoing, the income paid to the head office of a foreign corporation which has a branch office in the Philippines shall not be subject to the preferential tax rate if the income is not effectively connected to the said branch office. However, if the business transactions that give rise to the income came from a separate and independent transaction/source from the branch office here in the Philippines, it shall be subject to the preferential tax rate under the tax treaty. In this case, it was represented that SCPB is not privy and does not have any participation whatsoever in the holding of Sojitz 's shares of stocks in Sojitz PH. Therefore, applying the rules enunciated above, such dividends paid by Sojitz PH to Sojitz cannot be considered as effectively connected with SCPB. Further, since Sojitz holds directly at least 10% of Sojitz PH (in fact 40%) since 07 January 2005, this Office is of the opinion and so holds that the dividends paid by Sojitz PH to Sojitz are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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. Dated January 1, 2009. 2. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1981. 3. OECD Model Tax Convention on Income and on Capital, Condensed Version, Eighth Edition, 2010, p. 157. 4. G.R. No. 76573 dated September 14, 1989. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.