ITAD BIR Ruling No. 263-14

October 10, 2014 ITAD BIR RULING NO. 263-14 Article 10, Philippines-Japan tax treaty Kazuaki Takeuchi 5th Floor SMC-HOC, 40 San Miguel Avenue Mandaluyong City Gentlemen : This refers to your tax treaty relief application dated February 20, 2012 requesting for confirmation that dividends paid by San Miguel Brewery, Inc. ("SMB") to Kirin Holdings Co., Ltd. ("Kirin") are subject to a 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"). It is represented that Kirin is a foreign corporation organized and existing under the laws of Japan with its principal office address at 10-1 Shinkawa, 2-Chome, Chuo-ku, Tokyo, Japan based on its Residence Certificate dated March 14, 2012 issued by the District Director of Kyobashi Tax Office; that Kirin is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on August 31, 2011; and that on the other hand, SMB is a domestic corporation with principal address at 40 San Miguel Avenue, Mandaluyong City. It is further represented that on February 7, 2012 the Board of Directors of SMB declared cash dividends of P0.14 per share in favor of its stockholders of record as of February 22, 2012 based on the Certificate issued by the Corporate Secretary of SMB on February 20, 2012; that the said dividends were paid to Kirin on March 5, 2012 based on a Certificate of Remittance issued by HSBC; and that since 2009, Kirin holds 7,456,879,880 shares of stock or 48.39% in SMB based on the Certification issued by the Corporate Secretary on April 10, 2012. HCITDc 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, collection proceedings, or judicial appeal, based on the Certification issued by the Manager for Accounting and Financial Services of SMB on February 15, 2012. 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 Kirin, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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 . . ., dividends, . . .: 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 exempted 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. HIAEcT xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, 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 ; 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. 3. Notwithstanding the provisions of 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. xxx xxx xxx" 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 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; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. HTSAEa This being the case, and considering that Kirin holds 48.39 percent of the total shares of SMB during a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that such dividends paid by SMB to Kirin are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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 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.