ITAD BIR Ruling No. 262-11

November 10, 2011 ITAD BIR RULING NO. 262-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Sun Pioneer, Inc. Sitio Arajan, Pulong Sta. Cruz Sta Rosa, Laguna Attention: Mr. Kenji Ueda President Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 20, 2011, requesting confirmation that the dividend payments of Sun Pioneer, Inc. ("SPI") to San Ei Industry Co., Ltd. ("SEI") are subject to the 10 percent preferential withholding tax rate pursuant of the Article 10 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") . It is represented that SEI, with address at 10 Higashiura Takaoka-cho, Toyota-shi, Aichi, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty per the Certificate of Domicile issued by the District Director of Toyota Tax Office dated April 12, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 18, 2011; and that, on the other hand, SPI is a corporation organized and existing under the laws of the Philippines, with principal address at Sitio Arajan, Pulong Sta. Cruz, Sta. Rosa, Laguna. It is further represented that during the organizational meeting of the Board of Directors of SPI on April 15, 2011, a resolution was unanimously passed and approved declaring cash dividends as of December 31, 2010 in the total amount of Three Hundred Eighty-Five Thousand Two Hundred Ninety-Three Pesos and 06/100 (Php385,293.06) to be distributed in favor of all its stockholders of record in proportion to their respective current equity holdings in SPI on or before May 31, 2011; that per the Corporate Secretary's Certification issued by SPI on May 12, 2011, six (6) months immediately preceding the date of payment of the subject dividends, SEI owns Eighteen Thousand Six Hundred (18,600) common shares of stock with a total par value of Thirty-Seven Million Two Hundred Thousand Pesos (P37,200,000.00), or 40% of the entire stockholdings of SPI; and that the said cash dividends shall be paid on or before May 31, 2011. ICAcHE It is finally represented, per Certification dated April 20, 2011 issued by SPI, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims 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: "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 interest, 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): 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: ITSCED xxx xxx xxx (3) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It 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 percent 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. IAEcCa 3. Notwithstanding the provisions or 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. 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." Based on the aforequoted 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 percent of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines and b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that SEI holds more than 10 percent of the total outstanding capital of SPI, and that SEI maintains these shareholdings six months prior to the date of payment of the dividends, such dividends to be paid by SPI to SEI are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-11 dated January 28, 2011) This ruling is issued on the basis of the foregoing 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. TcEDHa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue