ITAD BIR Ruling No. 252-13

August 22, 2013 ITAD BIR RULING NO. 252-13 Article 10, Philippines-Japan Tax Treaty Nonato & Nonato Law Offices Room 406 Tulips Center A.S. Fortuna St. Bakilid, Mandaue City Cebu City Attention: Atty. Rester John L. Nonato Legal Counsel Gentlemen : This refers to your tax treaty relief application filed on October 20, 2011 requesting confirmation that the dividend payment of Yamashin Cebu Filter Manufacturing Corporation ("Yamashin Cebu") to Yamashin-Filter Corporation ("Yamashin Japan") are subject to the preferential tax rate of 10 percent based on Article 10 (2) (a) of 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 , as amended by its Protocol which took effect on January 1, 2009 ("Philippines-Japan tax treaty, as amended") . SCIacA It is represented that Yamashin Japan , with address at 1-11-5 Nishikanagawa Kanagawa-ku, Yokohama City, Kanagawa, 221-0822, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certificate of Residence issued by the District Director of Yokohamanaka Tax Office on June 25, 2011; that Yamashin Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated October 19, 2011; that Yamashin Cebu , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Mactan Economic Zone 2, Special Economic Zone, Basak, Lapu lapu City, 6015, Mactan, Cebu; that Yamashin Cebu , on the other hand, is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 89-014 dated April 14, 1989; and that the registration has not been revoked or cancelled per Certification issued by the Enterprise Services Division of PEZA dated September 8, 2011. It is also represented, per Corporate Secretary's Certificate dated October 18, 2011, that Yamashin Japan is a stockholder of record of Yamashin Cebu , with 1,229,995 common shares at par value of Php122,999,500.00, which constitutes 99.99% of the outstanding capital stock of Yamashin Cebu ; that the shares were acquired by Yamashin Japan by original subscription on April 14, 1989 and by increase in authorized capital stock on March 16, 2011 and March 28, 2011; that at a special meeting on September 16, 2011 of the Board of Directors of Yamashin Cebu , the Board resolved the declaration of a cash dividend in the amount of JY300,000,000.00 out of Yamashin Cebu 's unrestricted retained earnings as of fiscal year ended March 31, 2011 in favor of the stock holders of record as of the same date; and that said dividend payments were remitted by Yamashin Cebu to Yamashin Japan on October 25, 2011 per Bank Certification issued by RCBC. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on October 18, 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. TCacIA 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: "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. STcHEI xxx xxx xxx" In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. Its 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 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. 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. DHSaCA xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. Considering that during the period of six (6) months immediately preceding the date of payment of the cash dividend or since March 28, 2011, Yamashin Japan owns 99.99% shares in Yamashin Cebu , which is more than the 10 percent shareholding requirement of the total shares issued by that company, as shown in the certification issued by the Corporate Secretary of Yamashin Cebu dated October 18, 2011, the dividends paid to Yamashin Japan by Yamashin Cebu are subject to 10 percent of the gross amount of dividends, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue