ITAD BIR Ruling No. 234-14

October 8, 2014 ITAD BIR RULING NO. 234-14 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Mitsubishi Corporation Manila Branch 52nd Floor, PBCom Tower 6795 Ayala Avenue corner V.A. Rufino Street Salcedo Village, Makati City Attention: Naoki Motoi Treasurer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 26, 2012, requesting confirmation that the dividends paid by Ayala Corporation ("Ayala") to Mitsubishi Logistics Corporation ("MLC") are subject to the preferential final withholding tax rate of 15 percent pursuant to Article 10 (2) (b) 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 MLC is a corporation organized and existing under the laws of Japan with principal address at 28-38, Shinkawa 1-Chome, Chuo-Ku, Tokyo, Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty based on a Residence Certificate issued by the District Director of Kyobashi Tax Office on January 18, 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 February 2, 2012; and that, on the other hand, Ayala is a corporation organized and existing under the laws of the Philippines with principal address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that during the regular meeting of the Board of Directors of Ayala on May 29, 2012, a resolution was passed and approved authorizing the declaration and payment, from Ayala 's unappropriated retained earnings as of June 30, 2012, of cash dividends for the first semester of 2012 to all shareholders of Ayala 's Common Shares based on the following parameter: SHIETa Dividend rate: PhP2.00 per share Declaration Date: May 29, 2012 Ex-Date: June 13, 2012 Record Date: June 18, 2012 Payment Date: July 12, 2012 That per Secretary's Certificate issued by Ayala on June 25, 2012, as of June 18, 2012, MLC owns 360,512 common shares (with par value of P50.00 per share) which represents .0623% of the total issued and outstanding common shares of Ayala. It is finally represented, per the Sworn Certification issued by Ayala on June 25, 2012, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, 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 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 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%)." ITCcAD 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. " Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, 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: aDHCAE a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which 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 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. . . ." Based on the aforequoted provisions, dividends derived in the Philippines by a resident of Japan are subject to a preferential rate of 10 percent in two instances, a) if the beneficial owner is a company which 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 six months immediately preceding the date of payment of the dividends, and b) 15 per cent of the gross amount of the dividends in all other cases. aTICAc In view thereof and considering that MLC is a resident of Japan with no fixed place of business in the Philippines, and holds only .0623% of the total issued and outstanding common shares of Ayala, this Office is of the opinion as it hereby holds that the dividends paid by Ayala to MLC is subject to the 15 percent preferential tax rate, pursuant to the Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. 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