ITAD BIR Ruling No. 273-13

September 16, 2013 ITAD BIR RULING NO. 273-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor. Gamboa Sts. Makati City 1229 Attention: Atty. Alfredo C. Lim Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 23, 2012, on behalf of Toyota Tsusho Corporation ("Toyota Tsusho") , requesting confirmation that the dividends paid by Philippine Prosperity Chemicals, Inc. ("Philippine Prosperity") to Toyota Tsusho are subject to preferential rate of 10 percent pursuant to Article 10 of the amended 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, as amended") . It is represented that Toyota Tsusho , with address at 9-8 Meieki 4-chome, Nakamura-ku, Nagoya, Japan, 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 per the Residence Certificate issued by the District Director of Nagoya Nakamura Tax Office dated March 15, 2012; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 16, 2012; and that, on the other hand, Philippine Prosperity is a corporation organized and existing under the laws of the Philippines, with principal address at 1201 Picadilly Star Building, 4th Avenue corner 27th Street, Fort Bonifacio, Taguig City. HCIaDT It is further represented, that at the special meeting of the Board of Directors of Philippine Prosperity on March 9, 2012, the Board of Directors of Philippine Prosperity declared cash dividends in the amount of Twenty Million Pesos (Php20,000,000.00) to be distributed to stockholders of record in proportion to their respective percentage of holdings as of December 31, 2011, payable on June 29, 2012; that based on a Certification issued by the Corporate Secretary of Philippine Prosperity dated May 22, 2012, Toyota Tsusho owns 6,612,568 common shares with a total value of Php66,125,680.00 which represents 44.99% percentage ownership in Philippine Prosperity ; that these shares were acquired by Toyota Tsusho on various dates, from November 21, 2005 to December 31, 2007; and that, based on proof of bank remittance issued by Metropolitan Bank & Trust Company, such dividends were remitted to Toyota Tsusho on June 6, 2012. It is finally represented, per Sworn Statement dated May 22, 2012 issued by Philippine Prosperity , that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . HaTISE (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 interest, 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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. EAcIST xxx xxx xxx" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It 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 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 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. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident." LLjur Based on the aforequoted provision, 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 of the gross amount of the dividends if (i) the beneficial owner is a company which 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that Toyota Tsusho holds 44.99 percent ownership of Philippine Prosperity , and that Toyota Tsusho held these shareholdings for more than six months immediately preceding the date of payment of the dividends, such dividends paid by Philippine Prosperity to Toyota Tsusho are subject to the preferential tax rate of not exceeding 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. This ruling is issued on the basis of the foregoing 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. ScCIaA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue