ITAD BIR Ruling No. 240-11

November 3, 2011 ITAD BIR RULING NO. 240-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Everett Steamship Corporation Room 501, B.F. Condo. Building Andres Soriano Avenue cor. Solana Street Intramuros, Manila Attention: Yukio Kunimura Executive Vice President Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on June 10, 2011, on behalf of The Keihin Co., Ltd. ("Keihin") , requesting for a ruling that the dividend payments of Everett Steamship Corporation ("Everett") to Keihin are subject to the 10 percent preferential tax rate, pursuant to Article 10 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 Keihin, with principal address at 3-4-20, Kaigan, Mitato-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan under the provisions of the Philippines-Japan tax treaty per the Certificate of Residence issued by the District Director of Shiba Tax Office on June 15, 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 May 11, 2011; and that, on the other hand, Everett is a corporation organized and existing under the laws of the Philippines with principal address at Rm. 501, B.F. Condo. Building, Andres Soriano Avenue corner Solana Street, Intramuros, Manila. It is further represented that at the special meeting of the Board of Directors of Everett held on March 23, 2011, a resolution was unanimously approved that a cash dividend of P40.00 per share or a total of P10,413,160.00 be declared payable to the common stockholders of Everett, out of Surplus as of December 31, 2010, payable before June 30, 2011 or as soon as Everett is in a position to make the payments to the stockholders of record as of December 31, 2010; that based on the Certification issued by Everett dated June 6, 2011, Keihin owns 260,322 common shares in Everett as of December 31, 2010 with a par value of P100.00 per share equivalent to 99.997% ownership in Everett; that the 260,322 shares were acquired by Keihin on January 15, 2002, and 1 share was acquired on April 15, 2008. acHDTE It is finally represented per the Certification issued by Everett dated June 6, 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 by a nonresident foreign corporation in the Philippines. 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: EDSAac "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. 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. TEDHaA 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 aforeqouted 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. In view thereof and considering that Keihin holds directly 99.997% of the voting shares in Everett 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 Everett to Keihin 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-032-11 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. CSDTac Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue