ITAD BIR Ruling No. 254-14

October 10, 2014 ITAD BIR RULING NO. 254-14 Article 10 Philippines-Japan tax treaty, as amended TDK Philippines Corporation 119 East Science Avenue Special Export Processing Zone Laguna Technopark, Bian, Laguna Attention: Mr. Yasunari Maeda Treasurer Gentlemen : This refers to your tax treaty relief application filed on July 5, 2013 requesting confirmation that dividends paid by TDK Philippines Corporation ("TDK Philippines") to TDK Corporation ("TDK") are subject to preferential tax rate of 10 percent 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, as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended"). Facts TDK is a corporation organized and existing under the laws of Japan and is a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Hideki Toukai Tax Office in Japan on August 9, 2013. TDK is located at 9-1 Shibaura, 3-chome, Minato-ku, Tokyo, Japan. Based on the Certificate of Withdrawal of License of a Foreign Corporation issued by the Securities and Exchange Commission on September 26, 2002, TDK's petition for the withdrawal of its license to transact business in the Philippines was approved by the Commission on that date. On the other hand, TDK Philippines is a domestic corporation situated at 119 East Science Avenue, Special Export Processing Zone, Laguna Technopark, Bian, Laguna, Philippines. According to the two Secretary's Certificates issued on July 4, 2013 and August 22, 2013, the Board of Directors of TDK Philippines, during an organizational meeting held on June 28, 2013, declared cash dividends amounting to P1,142,980,820.33 (US$26,392,519.00) in favor of the company's stockholders of record as of March 31, 2013, and payable not later than July 31, 2013. As of record date, TDK holds 21,025,000 shares of stock of TDK Philippines which constitute 99.99 percent ownership in TDK Philippines. TDK holds these shares since May 27, 2010. IEaHSD Based on the electronically generated payments instruction issued by Bank of Tokyo-Mitsubishi UFJ Manila Branch, TDK Philippines remitted such dividend to TDK on July 24, 2013. Finally, 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, based on the Certification issued by the Assistant Corporate Secretary of TDK Philippines on July 31, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." TAaCED However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "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; ACEIac b) 15 per cent of the gross amount of the dividends in all other cases. 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." Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Accordingly, since TDK holds directly 99.99 percent of the total common shares of TDK Philippines since May 27, 2010, which is way above the minimum 10 percent shareholding and more than the minimum six month holding period, such dividend paid by TDK Philippines to TDK are subject to income tax at the rate of 10 percent pursuant to paragraph 2 (a), Article 10 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. HaTAEc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner 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 effective January 1, 2009. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.