ITAD BIR Ruling No. 255-13

August 22, 2013 ITAD BIR RULING NO. 255-13 Article 10 (Dividends), Philippines-Japan tax treaty MM Steel Service Center Corp. Peoples Technology Complex-SEZ, Bo. Cabilang Baybay, Carmona, Cavite 4116 Attention: Ms. Joan A. Oriondo Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 28 August 2012 requesting confirmation that dividends paid by MM Steel Service Center Corp. ("MM Steel-Philippines") to Marubeni Itochu Steel, Inc. ("Marubeni-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 ("Philippines-Japan tax treaty") . AcSIDE It is represented that Marubeni-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at Nihonbashi 1-chome Bldg., 4-1 Nihonbashi 1-chome, Chuo-ku, Tokyo, Japan based on a consularized and notarized Certificate of Status of Taxable Person issued by the corresponding Taxation Office in Japan and is a company engaged in the business of, among others, manufacturing, processing, import, export and sale of steel products such as steel bar, steel sheet and steel pipe based on the consularized and notarized Articles of Incorporation of Marubeni-Japan . The company Marubeni-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 23 August 2012. MM Steel-Philippines , on the other hand, is a domestic corporation registered as a PEZA entity under Certificate of Registration No. 09-48 with office address at Peoples Technology Complex-SEZ, Bo. Cabilang Baybay, Carmona, Cavite, 4116. MM Steel-Philippines is authorized by Marubeni-Japan to act on its behalf relative to application for tax treaty relief based on a consularized and notarized Special Power of Attorney executed by the President and CEO of Marubeni-Japan . It is further represented that as of 31 December 2011, Marubeni-Japan owns 60% of the authorized capital stock of MM Steel-Philippines consisting of 517,722 Class A Shares and 1,534,401 Class B Shares since 01 February 1991, and that on 25 May 2012 the Board of Directors of MM Steel-Philippines declared cash dividends amounting to Six Hundred Nine Thousand Eight Hundred Fifty Six Dollars and Seventeen Cents (US$609,856.17) in favour of all stockholders of record as of 31 December 2011 to be paid on 21 August 2012 based on the notarized Secretary's Certificate of MM Steel-Philippines . Further, On 24 September 2013, Marubeni-Philippines remitted the amount of Three Hundred Twenty Nine Thousand Three Hundred Twenty Two Dollars and Thirty Three Cents (US$329,322.33) based on a duly notarized Certification issued by Rizal Commercial Banking Corporation, Carmona Branch as proof of remittance. 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 Sworn Statement from the President and CEO of MM Steel-Philippines . TAIcaD 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 Marubeni-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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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." aHECST 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; 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. TAaCED Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 01 February 1991, Marubeni-Japan owns 60% shares in MM Steel-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividends paid by MM Steel-Philippines to Marubeni-Japan are 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.