ITAD BIR Ruling No. 253-13

August 22, 2013 ITAD BIR RULING NO. 253-13 Article 10, Philippines-Japan tax treaty, as amended Transnational Diversified Corporation The Penthouse, Net Quad Building 4th Avenue corner 30th Street E-Square Crescent Park West Bonifacio Global City, Taguig Attention: Socorro Z. Niro Chief Finance Officer Gentlemen : This refers to your tax treaty relief application filed on June 22, 2011, on behalf of NIPPON YUSEN KABUSHIKI KAISHA ("NYK") requesting confirmation that dividends to be paid by (1) NYK LOGISTICS PHILIPPINES, INC. ("NLPH"), (2) NYK Fil-Japan Shipping Corporation ("NYK-FJSC") and (3) NYK-FIL SHIP MANAGEMENT, INC. ("NYK-FIL") are subject to the preferential 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") . THcaDA It is represented that NYK, with address at 3-2, Marunouchi, 2-Chome, Chiyoda-ku, Tokyo, is a corporation organized and existing under the laws of Japan and is a resident thereof as certified by the District Director of Kojimachi Tax Office dated May 27, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission (SEC) dated June 10, 2011; that, on the other hand, 1) NLPH, 2) NYK-FJSC and 3) NYK-FIL are corporations duly organized and existing under Philippine laws with addresses at 1) G/F TDG-NYK Harbor Center Bldg. 1 cor. 23rd and 24th Streets, Port Area, Manila, 2) 2nd Floor NYK-TDG Harbor Center Bldg. cor. 23rd and 24th Streets, Port Area, Manila, respectively and 3) Cor. Sta Potentiana and Gen. Luna Streets, Intramuros, Manila; and that, as certified by their corporate secretary, NYK has shares in NLPH, NYK-FJSC and NYK-FIL, as follows: Details of NYK shares NLPH NYK-FJSC NYK-FIL as of date of record/ (Total outstanding (Total outstanding (Total outstanding payment of dividends shares = 1,000,000) shares = 5,450,000) shares = 31,360,000) No. of shares 510,000 2,779,500 7,840,000 Value of shares P100/share P100/share P100/share Type of shares Common Common Common Percentage of shares 51% 51% 25% Mode of acquisition Cash Purchase Cash Purchase Cash Purchase Date of Acquisition Since December 31, 2010 Since December 31, 2010 Since December 31, 2010 It is further represented that the respective Board of Directors of NLPH, NYK-FJSC and NYK-FIL passed and approved resolutions declaring cash dividends in favor of their stockholders of record, with details, as follows: HCIaDT Date of Board Resolution Declaring Dividends Amount of Dividends Date of Payment NLPH February 2, 2011 P47,561,432.00 June 30, 2011 March 18, 2011 P70,000,000.00 NYK-FJSC May 10, 2011 P20,000,000.00 July 31, 2011 December 16, 2011 NYK-FIL June 6, 2011 P7,000,000.00 July 31, 2011 It is finally represented that dividends in were paid by NYK-FJSC and NYK-FIL to NYK on different dates, as shown in the submitted proof of actual remittance, with the following details: Dividend Payor Amount of Dividend Remitted Date Remitted NYK-FJSC USD105,517.24 December 6, 2011 NYK-FIL USD36,628.00 July 11, 2011 As to the dividend payment of NLPH to NYK, it was shown, per Sworn Certification executed on March 25, 2013, that the dividend amount of P53,960,697.29 was not entirely remitted to Japan but a portion of which was used by NYK to invest and purchase shares of stocks in NYK Auto Logistics Philippines, Inc. (NALP) , as evidenced by Official Receipts issued by NALP to NYK for the following amounts: a) P10,200,000.00 OR 02258 issued on March 29, 2011 b) P11,630,697.00 OR 0008 issued on March 30, 2011 c) P29,169,303.00 OR 0009 issued on March 30, 2011 However, the dividend balance of P2,960,697.00 was remitted to Japan on July 1, 2011 , as evidenced by Telegraphic Transfer issued by the Bank of the Philippine Islands. It is finally represented, as certified by the Corporate Secretary of NLPH, NYK-FJSC and NYK-FIL, the dividends subject of the application for tax treaty relief are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, 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: IDCcEa "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, . . .: 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 this particular case, the treaty involved is the Philippines-Japan tax treaty, as amended. Its Article 10 provides: ICHcTD "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. DAcSIC xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. . . ." It is provided under paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended, that dividends paid by a Philippine corporation to a resident of Japan may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the 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. In all other cases, the 15 percent preferential tax rate shall apply. Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010 , published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: " SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis supplied) cACTaI In view thereof, since the TTRA was filed only on June 22, 2011 , this Office hereby DENIES relief on said dividends paid on or before June 22, 2011 , in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is, the payment of dividend. Accordingly, said dividends shall be subject to tax at the rate provided for in Section 28 of the Tax Code of 1997, as amended. On the other hand, this Office hereby GRANTS relief to the dividends paid by NLPH, NYK-FJSC and NYK-FIL to NYK after June 22, 2011 , since NYK owns more than 10 percent of the outstanding shares of the common stock of the paying corporations NLPH, NYK-FJSC and NYK-FIL during the period of six months immediately preceding the date of payment of the dividends or since December 31, 2010. Accordingly, said dividends are subject to the preferential rate of 10 percent withholding tax 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