ITAD BIR Ruling No. 237-13

August 15, 2013 ITAD BIR RULING NO. 237-13 Article 10, Philippines-Japan tax treaty, as amended International Electric Wires Phils. Corp. Luisita Industrial Park SEPZ, San Miguel Tarlac City 2301 Attention: Mr. Edwin P. Gonzales Treasurer/AVP-FAD Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on November 24, 2011, on behalf of Sumitomo Electric Industries, Ltd. ("SEIL") , requesting confirmation that dividend payment made by International Electric Wires Phils. Corp. ("IEWPC") to SEIL is subject to 10 percent preferential tax rate pursuant to 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 SEIL, with address at 4-5-33, Kitahama, Chuo-ku, Osaka, 541-0041, Japan, is a resident of Japan within the meaning of Article 4 of the Philippines-Japan tax treaty per Certificate of Residence issued by the District Director of Higashi Tax Office on November 11, 2011; that SEIL was issued a license to establish its representative office in the Philippines (" SEIL-Representative Office ") on March 14, 1996 and, to date, no petition for the withdrawal or cancellation of its license has been filed as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on November 21, 2011; and that IEWPC, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Luisita Industrial Park-Special Economic Zone, San Miguel, Tarlac City, 2301, Philippines, and is registered with the Philippine Economic Zone Authority (PEZA) with Certificate of Registration No. 95-123. Moreover, it is represented, per Secretary's Certificate issued by IEWPC on October 29, 2011, that the IEWPC's Board of Directors declared cash dividend of US$1,219,770.36 from IEWPC's unrestricted retained earnings payable to stockholders of record according to their capital contribution to be paid on or before November 30, 2011; that SEIL owns 13,500,000 common shares of IEWPC with par value of Php10.00 which consist of 54% ownership in IEWPC; that SEIL acquired the said shares in IEWPC by purchase on October 5, 1995; and that on November 25, 2011 IEWPC remitted to SEIL cash dividend amounting to US$529,808.39 per Advice Debit issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch on November 25, 2011. IcSHTA It is further represented, per notarized certification issued on May 17, 2012 by SEIL-Representative Office , that the SEIL-Representative Office does not have investment in shares of stock in IEWPC; that SEIL shares' in IEWPC were acquired directly by SEIL without any participation of SEIL-Representative Office ; and that the dividends paid by IEWPC is not to SEIL-Representative Office but to SEIL in Japan. It is finally represented, based on the Sworn Statement issued by IEWPC on November 24, 2011, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . . dividends, rents, royalties . . .: 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 of 1997, as amended, provides: EaTCSA "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" In relation thereto, the provisions of the Philippines-Japan tax treaty, as amended, may apply to the instant case, Article 10 of which reads: "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. CIDTcH 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. 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. xxx xxx xxx" Based on the foregoing 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 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 all other cases. Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents . (G.R. No. 76573 dated September 14, 1989), it was 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 that 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 of 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." Accordingly, the profits of a corporation which is a resident of Japan are taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, although the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by IEWPC to SEIL shall be considered as income of SEIL as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). ESTCHa In view of the foregoing and considering that SEIL holds 13,500,000 common shares, which represent 54 percent of IEWPC's total shares since October 5, 1995, this Office is of the opinion and so holds that the cash dividends paid by IEWPC to SEIL are subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) 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