ITAD BIR Ruling No. 270-14

October 10, 2014 ITAD BIR RULING NO. 270-14 Article 10, Philippines-Japan tax treaty, as amended Motokazu Hiraiwa 10th Floor San Miguel Properties Centre St. Francis Street, Mandaluyong City Dear Mr. Hiraiwa: This refers to your tax treaty relief application filed December 18, 2013 requesting confirmation that the dividends paid by San Miguel Yamamura Asia Corporation ("San Miguel") to Nihon Yamamura Glass Co., Ltd. ("Nihon Yamamura") are subject to preferential 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"). Facts Nihon Yamamura is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Incorporation and Residence Certificate issued by the Amagasaki Tax Office in Japan on December 12, 2012. Nihon Yamamura is located at 15-1, Nishimukojima-cho, Amagasaki, Hyogo, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on February 24, 2014. On the other hand, San Miguel is a domestic corporation located at 8th Floor San Miguel Properties Centre, No. 7 Saint Francis Street, Mandaluyong City, Philippines. Based on the Secretary's Certificate issued on December 13, 2013, the Board of Directors of San Miguel, during a regular meeting on December 5, 2013, unanimously approved a resolution declaring cash dividends amounting to P29,395,550.00 in favor of the company's preferred stockholders of record as of the same date, and payable on December 2013. As of record date on December 5, 2013, Nihon Yamamura holds 4,000,000 preferred shares of San Miguel representing 40 percent of the outstanding capital stock issued by San Miguel. Nihon Yamamura holds these shares since May 8, 2006. San Miguel remitted dividend amounting to P10,582,398.00 to Nihon Yamamura on December 26, 2013. cACTaI Ruling 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%)." EHCDSI 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. Paragraphs 1 and 2, 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; DHIcET b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." 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 Nihon Yamamura holds directly 40 percent of the total issued and outstanding shares of San Miguel since May 8, 2006, which is above the minimum 10 percent shareholding and more than the minimum six months holding period, such dividend paid by San Miguel to Nihon Yamamura 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. 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.