ITAD BIR Ruling No. 250-14

October 10, 2014 ITAD BIR RULING NO. 250-14 Article 10, Philippines-Japan tax treaty Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 1200 Makati City Attention: Eleanor L. Roque Head, Tax Advisory & Compliance Gentlemen : This refers to your tax treaty relief application filed on August 28, 2013, on behalf of, Sojitz Corporation ("Sojitz") and Sumitomo Metal Mining Co. Ltd. ("SMM"), requesting confirmation that the dividend payments of Coral Bay Nickel Corporation ("Coral Bay") to Sojitz and SMM are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, as amended 1 ("Philippines-Japan tax treaty"). Facts It is represented that Sojitz is a corporation duly organized and existing under the laws of Japan and is a resident thereof for tax purposes, with office address at 1-20, Akasaka 6-Chome Minato-ku, Tokyo 107-8655, Japan, per Certificate of Residence issued by the Azabu Tax Office of Japan; that Sojitz is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 25, 2013; that SMM is a corporation organized and existing under the laws of Japan and is a resident thereof for tax purposes, with office address at 11-3, 5-Chome, Shimbashi, Minato-ku, Tokyo, Japan, per Certificate of Residence issued by the Shiba Tax Office in Japan; that SMM is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated August 14, 2013; and that on the other hand, Coral Bay is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office at 24th Floor, NAC Tower, 32nd Street, Bonifacio, Taguig City. TEcAHI On July 3, 2013, as shown in the Secretary's Certificate issued by the Corporate Secretary, during the special meeting of the Board of Directors of Coral Bay, authorized and approved the declaration of cash dividend in the amount of Fourteen Million United States Dollars (US$14,000,000.00), to be taken out of the Coral Bay unrestricted retained earnings as of December 31, 2012, in favor of all stockholders of record as of July 3, 2013 and payable on or before August 31, 2013; that following are the stockholdings of Sojitz and SMM common share to Coral Bay : Name of Subscribed Mode of Acquisition Percentage Stockholder Number of Acquisition Date of Shares Ownership SUMITOMO 317,249,996 Original 4/25/2002 54% METAL MINING Subscription and CO. LTD. 4/10/2003 SOJITZ 105,749,999 Additional 7/26/2002 CORPORATION subscription and 18% 3/10/2003 It is finally represented, per Certification dated August 6, 2013 issued by Coral Bay, that the issue or transactions 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. Ruling 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." EHSADa 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: 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. 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. cTSHaE 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 aforequoted provisions, the Philippines may tax the dividends paid by 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 thereof. In the instant case, considering that Sojitz holds 18 percent (since March 10, 2003) and SMM holds 54 percent (since March 10, 2004) common shares of the total outstanding capital stock of Coral Bay, this Office is of the opinion and so holds that the cash dividends paid by Coral Bay to Sojitz and SMM 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. 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 Bureau 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.