ITAD BIR Ruling No. 265-14

October 10, 2014 ITAD BIR RULING NO. 265-14 Article 10 (Dividends), Philippines-Japan tax treaty, as amended Mitsubishi Corporation-Manila Branch 14F LV Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Mr. Kiyoshi Takagi Treasurer Gentlemen : This refers to your tax treaty application ("TTRA") filed on March 18, 2014, requesting confirmation that dividends paid by Manila Water Company (Manila Water) to Mitsubishi Corporation ("Mitsubishi") are subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as amended by the 2009 Protocol ("Philippines-Japan tax treaty"). Mitsubishi is a foreign corporation organized and existing under the laws of Japan with business address at 3-1 Marunouchi, 2-Chome, Chiyoda-Ku, Tokyo, Japan per residence certificate issued on April 4, 2014 by the District Director of Kojimachi Tax Office. It is licensed to do business in the Philippines since March 20, 1967 and to date, no petition for withdrawal or cancellation of license has been filed by the subject corporation per certification issued by the Securities and Exchange Commission on March 12, 2014. Although Mitsubishi has a branch in the Philippines, it has been represented that the Philippine branch has no participation whatsoever in the investment made by Mitsubishi in Manila Water as per affidavit executed by the treasurer of the Philippine branch on May 3, 2013. On the other hand, Manila Water is a corporation duly organized and existing under the laws of the Republic of the Philippines and registered with the Board of Investments (BOI) as a pioneer enterprise as a "new operator of water supply and sewerage system for the East Zone Service Area" per BOI Certificate of Registration No. 97-188 dated August 20, 1997 with principal address at MWSS-Admin. Bldg., Katipunan Road, 1105 Balara, Quezon City. THaCAI It is represented that Mitsubishi is the registered owner of Twenty-Eight Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine (28,999,999) shares in Bank of the Philippine Islands (BPI) Securities Corporation in STREET position held in Philippine Depository & Trust Company (PDTC) as of record date March 6, 2014 per certification issued by BPI on March 12, 2014 which states as follows: Issue No. of Market Price as of Market Value Name Code Shares March 6, 2014 Manila Water MWC 28,999,999 23.2500 Php674,249,976.75 Company, Inc. Grand Total Php674,249,976.75 ============== It is also represented that on February 20, 2014, Manila Water, through its Board of Directors, declared cash dividends for the first semester of 2014 (a) Php0.4031 per share on the outstanding common shares; and (b) Php0.0403 per share on the outstanding participating preferred shares payable on March 21, 2014 to all stockholders of record as of March 6, 2014; and that on April 29, 2014, USD Two Hundred Thirty-Six Thousand Twenty-Four and 66/100 (USD236,024.66) was paid to Mitsubishi Tokyo through BPI. It is further represented, per sworn certification issued on March 13, 2014 by the Chief Finance Officer and Treasurer of Manila Water that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to Mitsubishi are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-resident 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%)." ITESAc However, under Section 32 (B) (5) of the Tax Code, these dividends may be subjected 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." For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraph 1, 2, & 3 of 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. aDHScI 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." Under paragraphs 2 and 3 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 (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 during the 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 investment incentives laws of the Philippines; and (c) 15 percent in all other cases. Accordingly, considering that the dividends were paid to Mitsubishi, a resident of Japan by Manila Water, a domestic corporation registered with the BOI and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, this Office is of the opinion and so holds that such dividends paid by Manila Water to Mitsubishi is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (3) 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.