ITAD BIR Ruling No. 273-11

November 15, 2011 ITAD BIR RULING NO. 273-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 35-10; BIR Ruling No. ITAD 11-10; BIR Ruling No. ITAD 8-10; BIR Ruling No. ITAD 7-10; Asia Pacific Business Legal Consulting 2nd Floor Building, B. Mactan Marina Mall Mactan Economic Zone 1 Ibo, Lapulapu City 6015 Cebu, Philippines Attention: Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application dated September 14, 2011, on behalf of IINO Manufacturing Co. Ltd. ("IINO") , requesting confirmation that dividends received by IINO from Philippine IINO Corporation ("IINO Philippines") are subject to the preferential tax 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 (hereinafter referred to as the "Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. Facts It is represented that IINO is a corporation organized and existing under the laws of Japan and is a resident of Japan within the meaning of the Philippines-Japan tax treaty, based on its Articles of Incorporation and on the Certificate of Residence issued by the Tax Authority of Japan; that IINO is situated in Omiya Ward, Saitama City, Saitama-Prefecture, Japan; that IINO 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 dated May 30, 2011; and that, on the other hand, IINO Philippines is a corporation organized and existing under the laws of the Philippines situated at Dinagyang Street, Mactan Economic Zone II, Lapulapu City, Cebu, Philippines. It is further represented that on March 22, 2011, the Board of Directors of IINO Philippines duly approved a resolution declaring cash dividends amounting to P5,000,000.00 in favor of its stockholders of record as of December 31, 2010, payable on or before December 31, 2011; that IINO holds 158,803 shares in IINO Philippines acquired by IINO on various dates from 1993 to 2000; and that said shares represents 95% percent of the total issued and outstanding capital stock of the entire capital stock of IINO Philippines , based on the Certificate issued by the same Corporate Secretary on August 31, 2011. It is finally represented that the dividends subject of the request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Certificate issued by the Managing Director and Treasurer of IINO Philippines on August 31, 2011. Ruling In reply, please be informed that dividends derived by a nonresident foreign corporation are taxable generally under Section 28, (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, which provides: "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, . . . : Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such dividends may be exempt (or partially exempt) from income tax pursuant to a treaty obligation to which the Philippine government is bound. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: 1 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." With respect to a tax treaty, Article 10 of the Philippines-Japan tax treaty, as amended, provides: "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." Under paragraph 2 above, the Philippines may tax dividends paid by a domestic company to a company resident of Japan at a rate not exceeding 10 percent of the gross amount thereof 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. Otherwise, a rate of 15 percent applies. In view of the foregoing, considering that, as of the record date of December 31, 2010, and the intended date of payment on December 31, 2011 IINO holds 95.37 percent of the total issued and outstanding capital stock of the entire capital stock of IINO Philippines , such dividends to be paid by IINO Philippines to IINO are subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2, 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 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. TITLE II TAX ON INCOME.