ITAD BIR Ruling No. 262-14

October 10, 2014 ITAD BIR RULING NO. 262-14 Article 10, Philippines-Japan tax treaty SIIX Logistics Phils., Inc. 125 Technology Avenue, Phase 4 Special Export Processing Zone Laguna Technopark, Bian, Laguna Attention: Shigeru Ochiai Managing Director Gentlemen : This refers to your application for tax treaty relief application filed on April 11, 2012, requesting confirmation that the dividends to be paid by SIIX Philippines, Incorporated ("SIIX Phils") to SIIX Corporation ("SIIX Japan") are subject to the preferential 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 ("Philippines-Japan tax treaty"). Facts It is represented that SIIX Japan is a foreign corporation organized and existing under the laws of Japan with its principal office address at 1-4-9, bingo-machi, chuo-ku, Osaka 541-051, Japan, based on its Residence Certificate issued by the District Director of Higashi-Tax Office dated April 2, 2012; that SIIX Japan is not registered as a corporation or as a partnership based on the Certification issued by the Securities and Exchange Commission on April 3, 2012; and that on the other hand, SIIX Phils is a domestic corporation situated at Room 610 Page 1 Building. 1215 Acacia Avenue, Madrigal Business Park, Alabang, Muntinlupa. It is further represented that on April 2, 2012, the Board of Directors of SIIX Phils declared cash dividends amounting to P2,973,064 or P20.2249 per share from unappropriated retained earnings as of December 31, 2011 in favor of its stockholder of record as of same date payable on April 26, 2012; that as of December 31, 2011, SIIX Phils confirms SIIX Japan stockholdings as follows: Type of Shares Number Par Value Mode of Date of Percentage of Shares Acquisition Acquisition of Ownership Common 146,995 P1,000.00 sale October 2003 99.99% Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to SIIX Japan, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: TSacID "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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that 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: "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. xxx xxx xxx" For this purpose, you invoke the Philippines-Japan tax treaty, as amended, Article 10 thereof, provides as follows: IASCTD "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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. Accordingly, considering that SIIX Japan holds directly 99.99 percent of the total shares of stock of SIIX Phils during the period of six months immediately preceding the date of payment of the dividends or since October 2003, such dividends paid by SIIX Phils to SIIX Japan are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. SEcITC 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 Bureau of Internal Revenue