ITAD BIR Ruling No. 264-14

October 10, 2014 ITAD BIR RULING NO. 264-14 Article 10, Philippines-Japan tax treaty, as amended Toyota Motor Philippines Corporation Toyota Special Economic Zone Santa Rosa-Tagaytay Highway Santa Rosa City, Laguna Attention: Blesilda M. Rodriguez First Vice President-Comptrollership Gentlemen : This refers to your tax treaty relief application filed on May 21, 2014 requesting confirmation that dividends paid by Toyota Motor Philippines Corporation ("Toyota-Philippines") to Toyota Motor Corporation ("Toyota") 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, as amended"). It is represented that Toyota is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Incorporation and Certificate of Residence issued by the Toyota Tax Office in Japan on April 7, 2014; that Toyota is located at No. 1 Toyota-cho, Toyota City, Aichi Prefecture, Japan; that Toyota was previously license to transact business in the Philippines, however, based on the Certification issued by the Securities and Exchange Commission on April 29, 2014, Toyota's Certificate of Cancellation of License of a Foreign Corporation was issued on July 9, 1990; and that, on the other hand, Toyota-Philippines is a domestic corporation with principal office address at Toyota Special Economic Zone, Santa Rosa-Tagaytay Highway, Santa Rosa City, Laguna, Philippines. It is further represented based on the Secretary's Certificate issued on May 6, 2014, that the Board of Directors of Toyota-Philippines, at an Organizational Meeting held on April 29, 2014, unanimously approved a resolution declaring cash dividend of P4,608,597,776.00, equivalent to 297.44 percent of the outstanding capital stock of Toyota-Philippines, in favor of the company's shareholders of record as of December 31, 2013, and payable on June 2014; that as of record date on December 31, 2014, Toyota holds 5,267,996 common shares, which represents 34 percent of the total shares of stock issued by Toyota-Philippines; and that Toyota acquired the said shares in Toyota by purchase and stock dividends from 1988 to 2013. HIESTA 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 tax credit certificate, collection proceeding, or judicial appeal, based on the Sworn Statement issued by the First Vice President of Toyota-Philippines on May 7, 2014. In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." In this particular case, you invoke the Philippines-Japan tax treaty, as amended. Article 10 thereof provides: DIHETS "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." Under 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 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, and 15 percent in all other cases. Accordingly, since Toyota holds directly at least 10 percent of the total shares of Toyota-Philippines during a period of six months immediately preceding the date of payment of the dividends, where Toyota actually holds 34 percent of these shares since December 2013, such dividends paid by Toyota-Philippines to Toyota are subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 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. DHCSTa 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. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.