ITAD BIR Ruling No. 251-13

August 22, 2013 ITAD BIR RULING NO. 251-13 Article 10 (Dividends), Philippines-Japan tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Philippines Attention: Vicente Gregorio S. Sebastian Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 13 March 2013 requesting confirmation that dividends paid by Hankyu Hanshin Express Philippines, Inc. ("Hankyu-Philippines") to Hankyu Hanshin Express Co., Ltd. ("Hankyu-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) pursuant to 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 1 ("Philippines-Japan tax treaty") . aIcETS It is represented that Hankyu-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 2-5-25 Umeda, Kita-ku, Osaka, Japan based on a notarized and consularized Status of Taxable Person issued by the Kta Tax Office and is a company engaged in forwarding and sales agent for airlines, shipping companies, railroad companies, street car lines and other carriers, among other business purposes based on the notarized and consularized Company Registry issued by the Ministry of Foreign Affairs of Japan. The company Hankyu-Japan is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 30 January 2013. Hankyu-Philippines , on the other hand, is a domestic corporation with office address at Amvel Business Park, Brgy. San Dionisio, Paraaque City 1700. The firm of Sycip Gorres Velayo & Co. is authorized by Hankyu-Japan to act on behalf of the company in relation to the application of a ruling based on a notarized and consularized Special Power of Attorney executed by the Director and President of Hankyu-Japan . It is further represented that Hankyu-Japan owns 40% of the authorized capital stock of Hankyu-Philippines or One Hundred Nineteen Thousand Nine Hundred Ninety Four shares with a value of Eleven Million Nine Hundred Ninety Nine Thousand Four Hundred Pesos (Php11,999,400.00) all of which have been fully paid up based on a notarized Secretary's Certificate executed by the Corporate Secretary of Hankyu-Philippines ; that Hankyu-Japan owns One Hundred Nineteen Thousand Nine Hundred Ninety Four (119,994) common shares of Hankyu-Philippines representing 40% of the total issued and outstanding stocks of Hankyu-Philippines ; and that Hankyu-Japan held these shares since 01 July 2002. On 13 February 2013, Hankyu-Philippines declared cash dividends in the total amount of Nine Million Two Hundred Forty One Thousand Pesos (Php9,241,000.00) to be distributed among the stockholders of record as of 12 December 2012 to be payable on or before 26 March 2013 based on a notarized Secretary's Certificate executed by the Corporate Secretary of Hankyu-Philippines . acTDCI Further, on 21 March 2013, Hankyu-Philippines remitted the amount of Eighty One Thousand Five Hundred Thirty Four US Dollars and Sixteen Cents (US$81,534.16) as cash payment dividends based on a notarized Certificate of Remittance issued by the Manila Branch of Bank of Tokyo-Mitsubishi UFJ. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Statement of Hankyu-Philippines Treasurer Vicente Gregorio S. Sebastian. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Hankyu-Japan are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." cAECST However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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." For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "Article 10 Dividends 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 the 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; ETISAc 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. xxx xxx xxx 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 above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Considering that during the period of six (6) months immediately preceding the date of payment of cash dividend, Hankyu-Japan owns 40% shares in Hankyu-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate since 01 July 2002, the dividend paid by Hankyu-Philippines to Hankyu-Japan is subject to the preferential tax rate of 10 percent of 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 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. CSEHcT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by the 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 effective January 01, 2009.