ITAD BIR Ruling No. 234-12

June 6, 2012 ITAD BIR RULING NO. 234-12 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-199-11 SHI Designing & Manufacturing, Inc. 8th & 9th Floors, Octagon Center Building San Miguel Avenue, Ortigas Center Pasig City Attention: Mr. Masao Yokoo President and CEO Gentlemen : This refers to your application for tax treaty relief dated August 25, 2011 requesting confirmation that the dividends received by Sumitomo Heavy Industries (SHI) Ltd. ("SHI Japan") from SHI Designing and Manufacturing, Inc. ("SHI Phil") are subject to the preferential 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty") . It is represented that SHI Japan is a foreign corporation organized and existing under the laws of Japan with its principal office address at 1-1 Osaki 2-chome, Shinagawa-ku, Tokyo, Japan, based on its Tax Residency Certificate issued by the District Director of Shinagawa Tax Office on June 30, 2011; that SHI Japan is not registered as a corporation or partnership in Philippines based on the Certification issued by the Securities and Exchange Commission on August 10, 2011; and that on the other hand, SHI Phil is a domestic corporation situated at the 8th and 9th Floor, Octagon Building, San Miguel Avenue, Ortigas Center, Pasig City. It is further represented that during a meeting of the board of directors of SHI Phil held on April 25, 2011, SHI Phil declared cash dividends in the amount of PhP440,127.20 in favor of the following stockholders of record as of April 25, 2011: Stockholders No. of shares Cost per share Cash dividends (PhP) Sumitomo Heavy Ind. 127,485 3.4519780 440,075.41 Ltd. Masao Yokoo 3 3.4519780 10.35 Mari Hosokawa 3 3.4519780 10.35 Shogo Aoki 3 3.4519780 10.35 Takashi Yamashiro 3 3.4519780 10.35 Mitsuo Suzuki 1 3.4519780 3.45 Kiyotaka Yano 1 3.4519780 3.45 Akiya Maekawa 1 3.4519780 3.45 127,500 440,127.20 ====== ========= that SHI Japan owns a total of 127,485 shares with a par value of PhP100.00 per share since October 22, 1999 or 99.988% ownership in SHI Phil based on the Certifications issued by the Corporate Secretary of SHI Phil on August 18, 2011 and August 4, 2011, respectively; and that the subject dividends shall be paid on October 11, 2011 based on the Certificate issued by the Corporate Secretary of SHI Phil on November 8, 2011. DaHSIT 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 Corporate Secretary of SHI Phil on August 18, 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 SHI Japan , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 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 . . . , 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 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. aTcIAS xxx xxx xxx" In this particular case, 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. aAcDSC xxx xxx xxx" (underscoring supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, beginning January 1, 2009, at a rate not to exceed: (a) 10 percent 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 for a period of six months immediately preceding the date of payment of the dividends; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that SHI Japan holds 99.988 percent of the total shares of SHI Phil during a period of at least six months immediately preceding the date of payment of the dividends (in fact, since October 22, 1999), this Office is of the opinion and so holds that such dividends paid by SHI Phil to SHI Japan are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-199-11 dated July 26, 2011) . 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 effective January 1, 2009.