ITAD BIR Ruling No. 266-13

September 16, 2013 ITAD BIR RULING NO. 266-13 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 May 6, 2013, requesting confirmation that dividends paid by Ayala Corporation (Ayala) to Mitsubishi Corporation ("Mitsubishi Tokyo") 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 the Japan with respect to Taxes on Income, as amended (Philippines-Japan tax treaty) . Mitsubishi Tokyo is a foreign corporation organized and existing under the laws of Japan with business address at 3-1 Marunouchi, 2-Chrome, Chiyoda-Ku, Tokyo, Japan per residence certificate issued on January 11, 2013 by the 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 January 11, 2013. Although Mitsubishi Tokyo has a branch in the Philippines, it has been represented that the Philippine branch has no participation whatsoever in the investment made by Mitsubishi Tokyo as per affidavit executed by the treasurer of the Philippine branch on May 2, 2013. On the other hand, Ayala is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. TDSICH It is represented that starting May 20, 2010 and as of April 23, 2013, Mitsubishi Tokyo is the registered owner of Thirty Two Million Six Hundred Forty Thousand Four Hundred Ninety Two (32,640,492) unlisted voting preferred shares constituting 16.320246% of Ayala's total issued and outstanding voting shares. It is also represented that on December 14, 2012, Ayala, through its Board of Directors, declared cash dividends on its 200,000 outstanding unlisted preferred shares with a rate of 5.2817% per annum in the amount of Ten Million Five Hundred Sixty Three Thousand Four Hundred Pesos (P10,563,400.00) payable to all the shareholders as of record date April 23, 2013 and payable on May 20, 2013; and that, per notarized certification issued by BPI Stock Transfer Office dated June 3, 2013, One Million Five Hundred Fifty One Thousand Five Hundred Seventy Five and 58/100 Pesos (P1,551,575.58) were debited from the account of Ayala Preferred Shares under account number 0011-1728-22 and were paid to Mitsubishi Tokyo, on May 20, 2013. It is further represented, per sworn certification issued on April 26, 2013 by the Assistant Corporate Secretary of Ayala 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 Tokyo 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 . DSITEH (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, these 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: "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." ETHCDS For this purpose, you invoke the Philippines-Japan tax treaty as amended. Paragraphs 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. 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. HaTSDA (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. AcSEHT Accordingly, considering that Mitsubishi Tokyo holds 32,640,492 unlisted voting preferred shares since May 20, 2010 , constituting 16.320246%, which is more than ten percent (10%) of Ayala's total issued and outstanding voting shares, dividend paid by Ayala to Mitsubishi Tokyo is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) 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. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.