ITAD BIR Ruling No. 239-11

November 3, 2011 ITAD BIR RULING NO. 239-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Castillo Laman Tan Pantaleon & San Jose The Valero Tower 122 Valero Street, Salcedo Village 1227 Makati City Attention: Ma. Victoria D. Sarmiento Abigail D. Sese Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 1, 2011, on behalf of Japan Envirochemicals, Ltd. ("JEL") , requesting confirmation that the dividends paid by Davao Central Chemical Corporation ("DCCC") to JEL are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) 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 JEL, with principal address at 2-37, Chiyozaki 3-chome-minami, Nishi-ku, Osaka 550-0023, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof per the Certificate issued by the District Director of NISHI Tax Office on May 20, 2011; 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 July 16, 2010; and that, on the other hand, DCCC is a corporation organized and existing under the laws of the Philippines with principal address at Km. 19 Tibungko, Davao City. It is further represented that at the special meeting of the Board of Directors held on March 28, 2011, a resolution was passed and approved by the Board of DCCC to declare cash dividends of P2.73 per share or a total amount of P8,026,200.00 out of the retained earnings of DCCC as of December 31, 2010, to stockholders of record as of March 28, 2011 payable not later than March 31, 2011; that based on the Secretary's Certificate issued by DCCC dated May 12, 2011, JEL owns 2,352,000 common shares inclusive of four (4) shares held in trust by JEL's nominee-directors valued at Php23,520,000.00, which represent 80 percent ownership in DCCC and that the said shares were acquired by JEL since January 25, 2006 and are still being held by JEL up to the present date. IcHEaA It is finally represented, per the Sworn Statement issued by DCCC dated March 30, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, 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%)." 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." In relation to a treaty, Article 10 of the Philippines-Japan tax treaty, as amended, 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. STaHIC 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. 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." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. EHcaDT In view thereof and considering that JEL holds directly 80 percent of the voting shares in DCCC or more than the required minimum shareholdings of 10 percent, for not less than 6 months immediately preceding the date of payment, said dividends paid by DCCC to JEL are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-038-11 dated February 8, 2011) 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