ITAD BIR Ruling No. 268-14

October 10, 2014 ITAD BIR RULING NO. 268-14 Article 10, Philippines-Japan tax treaty International Wiring Systems (Phils) Corporation Luisita Industrial Park, SEZ San Miguel, Tarlac City Attention: Robert S. Balatbat Accounting Manager Gentlemen : This refers to your tax treaty relief application filed on July 24, 2013, requesting confirmation that dividends paid by International Wiring Systems (Phils.) Corporation ("International Wiring") to Sumitomo Wiring Systems Ltd. ("Sumitomo") are subject to income tax at the rate of 10 percent 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 ("Philippines-Japan tax treaty"). Facts It is represented that Sumitomo is a foreign corporation organized and existing under the laws of Japan and is a resident thereof for tax purposes per Certificate of Residence issued by Yokkaichi Tax Office on May 24, 2013; that Sumitomo is situated at 1-14 Nishisuehiro-cho, Yokkaichi, Mie, 510-8503, Japan; that Sumitomo is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on November 22, 2013; and that, on the other hand, International Wiring is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at Luisita Industrial Park, SEZ, San Miguel, Tarlac City. It is also represented that Sumitomo is the registered owner of 37,416,000 common shares as of July 12, 2013, (acquired on various dates until August 5, 2004) representing 80% of International Wiring issued and outstanding shares; that on July 12, 2013, the Board of Directors of International Wiring declared cash dividends amounting to US$1,978,173.22 and payable to stockholder of record according to their capital contribution to be paid August 2013. cIEHAC It is further represented, per sworn certification issued on July 20, 2013 by the President of International Wiring 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. Ruling 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 Sumitomo, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 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 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): 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 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. xxx xxx xxx" For this purpose, you invoke the Philippines-Japan tax treaty, as amended, provides as follows: acSECT "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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. Accordingly, considering that Sumitomo holds directly 80 percent of the total shares of stock of International Wiring during the period of six months immediately preceding the date of payment of the dividends or since July 13, 2012, such dividends paid by International Wiring to Sumitomo are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. ADTEaI 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