ITAD BIR Ruling No. 256-13

August 22, 2013 ITAD BIR RULING NO. 256-13 Article 10, Philippines-Japan Tax Treaty Imasen Philippine Manufacturing Corporation 101 East Main Avenue Laguna Technopark Bian, Laguna Attention: Akihito Yoshida President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 25 March 2013 , requesting confirmation that the dividend payment by Imasen Philippine Manufacturing Corporation ("IPMC") , to Imasen Electric Industrial Co., Ltd. ("IEIC") , is subject to the preferential tax rate of 10 percent (10%) pursuant to 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 a Protocol 1 ("Philippines-Japan tax treaty") . IHEAcC It is represented that IEIC is a corporation organized and existing under the laws of Japan and is a resident thereof with business address at No. 1, Aza-Kakihata, Inuyama, Aichi-pref, Japan, as evidenced by the Certificate of Residence dated 07 March 2013, which was authenticated by the Consul of the Republic of the Philippines in and for Osaka, Japan dated 14 March 2013; that IEIC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated 08 March 2013; and that on the other hand, IPMC is a corporation organized and existing under the laws of the Philippines with business address at 101 East Main Avenue, Laguna Technopark, Bian, Laguna. It is further represented, as certified by the Corporate Secretary of IPMC executed on 14 March 2013, that in a special meeting of the Board of Directors of IPMC held on 04 March 2013, the latter declared cash dividend equivalent to Twenty Six Million Eight Hundred Sixty Seven Thousand Six Hundred Eighty Four and 81/100 Philippine Pesos (PhP26,867,684.81) for all stockholders on record as of 04 March 2013, payable on or before 26 March 2013; that IEIC holds 146,246 shares with par value of PhP1,000 per share, amounting to PhP146,246,000.00, which is equivalent to 90% of the total outstanding shares of IPMC, since 17 April 2008. It is further represented that the payment of the subject cash dividend was made by IPMC through Bank of Tokyo-Mitsubishi UFJ ("BTMU") in favor of IEIC, in the amount of JPY50,017,500.00 on 26 March 2013, as evidenced by the Certificate of Remittance issued by BTMU, executed on 02 April 2013. It is finally represented that the dividend subject of this TTRA are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Accounting Assistant Manager of IPMC executed on 20 March 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, cash dividend paid to IEIC are subject to income tax at the rate of 30 percent, thus: ISTHED "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 percent (30%) 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 However, under Section 32 (B) (5) of the Tax Code, such 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, Article 10 thereof provides: EaICAD "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." Under paragraph 2 (a) of 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% of the gross amount of the dividends if the company recipient of the dividends holds directly at least 10% 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 dividend payment. Accordingly, since IEIC holds directly more than 10% of IPMC (in fact 90%) within 6 months period prior to the date of payment of the dividend or since 17 April 2008, the dividend payment by IPMC to IEIC is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. EHSTDA 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 Footnotes 1. Date of effectivity, January 1, 2009. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.