ITAD BIR Ruling No. 272-13

September 16, 2013 ITAD BIR RULING NO. 272-13 Article 10, Philippines-Japan tax treaty Jimenez Gonzales Bello Valdez Caluya & Fernandez Attorneys and Counsellors at Law SOL Building 112 Amorsolo Street Legaspi Village, Makati City Attention: Atty. V.E. Jimenez Atty. Marie Irahlyn C. Burog Atty. Ruben C. Casibang Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 29, 2013 requesting confirmation that dividends paid by Technol Eight Philippines Corporation ("Technol Eight Philippines") to Technol Eight Company Ltd. ("Technol Eight") are subject to income tax at the 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 ("Philippines-Japan tax treaty") . 1 Technol Eight is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and Certification of Domicile issued by the Owariseto Tax Office in Japan on March 26, 2013. Technol Eight is located at 1 Akatsuki-cho, Seto-shi, Aichi, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 2, 2013. On the other hand, Technol Eight Philippines is a domestic corporation located at 127 East Main Avenue, Laguna Technopark, Special Economic Zone, Bian, Laguna, Philippines. Based on the Corporate Secretary's Certificate issued on May 24, 2013 and the Minutes of the Meeting of the Board of Directors on even date, Technol Eight Philippines declared cash dividends amounting to P53,400,000.00 and in favor of its stockholders as of April 30, 2013. The dividends will be taken from the corporation's retained earnings as of December 31, 2012 and will be paid on May 31, 2013. SAEHaC As of May 31, 2013, the following are the stockholders of Technol Eight Philippines : Name of Nationality Number of Type of Par Amount Paid Percentage Stockholder Shares Shares Value of Subscribed Ownership Technol Eight Japanese 2,474,845 Common P100 P247,484,500.00 99.99 4 nominees Japanese 4 Common 100 400.00 - 1 nominee Filipino 1 Common 100 100.00 - Total 2,474,850 247,485,000.00 ======== =========== Technol Eight acquired these shares by subscription on January 13, 1998 (1,160,000 at the time of incorporation of Technol Eight Philippines ),February 23, 1998 (330,000),June 4, 1998 (600,000),and May 23, 2002 (384,850). The subject dividends were paid by Technol Eight Philippines to Technol Eight as follows: Date of Amount Remitting Bank Reference Receiving Bank Remittance Number May 31, 2013 US$1,136,734.55 Metropolitan Bank FTT0531130021 Sumitomo-Mitsui (114,571,475.00) and Trust Banking Company Corporation Toyota Branch Ruling 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 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: cIECaS " 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%) ." (Emphasis ours) CHDaAE 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 regard, Article 10 of the Philippines-Japan tax treaty provides relief to dividends as follows: "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: EDISTc 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." Under this article, 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 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, and (b) 15 percent in all other cases. Accordingly, since Technol Eight holds directly at least 10 percent of the total shares of Technol Eight Philippines during the period of six months immediately preceding the date of payment of the dividends on May 31, 2013, where Technol Eight actually holds 99.99 percent of the total shares of Technol Eight Philippines since May 23, 2002 ,such dividends paid by Technol Eight Philippines to Technol Eight shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. cACHSE 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 of Internal Revenue Footnotes 1. As amended by the 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 .