ITAD BIR Ruling No. 266-11

November 10, 2011 ITAD BIR RULING NO. 266-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 060-10; BIR Ruling No. ITAD 059-10 Mabuhay Vinyl Corporation 3rd Floor Philamlife Salcedo Center L.P. Leviste Street, Salcedo Village Makati City Attention: Michael S. Yu AVP, Corporate Planning & OIC for Finance Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 8, 2011 requesting confirmation that the dividends paid by Mabuhay Vinyl Corporation ("Mabuhay Vinyl" ) to Tosoh Corporation ("Tosoh") are subject to 10 percent preferential tax rate pursuant to 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 Tosoh is a foreign corporation organized and existing under the laws of Japan with principal office at 4560 Kaisei-cho, Shuunan-shi, Yamaguchi 746-8501, Japan based on its Residence Certificate issued by the District Director of Tokuyama Tax Office dated February 8, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated April 8, 2011; and that Mabuhay Vinyl , on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at 3rd Floor Philamlife Salcedo Center, L.P. Leviste Street, Salcedo Village, Makati City, Philippines. It is further represented that on March 17, 2011, the Board of Directors of Mabuhay Vinyl approved a resolution declaring a 4 percent per share cash dividend to all stockholders of record of Mabuhay Vinyl as of March 31, 2011, payable not later than April 28, 2011; and that as per Secretary's Certification dated August 16, 2011, issued by the Assistant Corporate Secretary of Mabuhay Vinyl, Tosoh holds 264,006,806 shares of Mabuhay Vinyl constituting 38.35583 percent ownership in the company; that the said shares were acquired by Tosoh on various dates from October 2000 to January 2010. AEDCHc It is finally represented that the issue or transaction subject of this request or 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 as per certification issued by the Assistant Vice President-Corporate Planning and OIC for Finance of Mabuhay Vinyl dated April 5, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows. "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporations. (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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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: AHCETa 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." Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "Article 10 DIVIDENDS 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. IESAac 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. 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. xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a company which is a Philippine resident to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. EICScD In view thereof, and considering that Tosoh holds 264,006,806 shares of Mabuhay Vinyl constituting 38.35583 percent ownership in the company, which is more than 10 percent of the issued and outstanding shares of Mabuhay Vinyl for more than 6 months immediately preceding the date of payment of the dividends, this Office is of the opinion, and hereby holds, that the said dividends paid by Mabuhay Vinyl to Tosoh are subject to 10 percent preferential tax rate prescribed under Article 10 of the Philippines-Japan tax treaty, as amended (BIR Ruling No. ITAD 060-10 dated November 3, 2010; and BIR Ruling No. ITAD 059-10 dated November 3, 2010) . 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue