ITAD BIR Ruling No. 274-14

October 10, 2014 ITAD BIR RULING NO. 274-14 Article 10 (a) (Dividends) Philippines-Japan tax treaty Mitsubishi Corporation-Manila Branch 14th Floor L.V. Locsin Building 6752 Ayala Avenue Corner Makati Avenue, Makati City Attention: Mr. Kiyoshi Takagi Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 26 December 2013 requesting confirmation that dividends paid by Ayala Corporation ("Ayala-Philippines") to Mitsubishi Corporation ("Mitsubishi-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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 It is represented that Mitsubishi-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at Marunouchi, 2-chome, Chiyoda Tokyo, Japan, and is a company engaged in the business of manufacturing, importing and exporting of a variety of products and participating in public and private bidding for the design, supply, fabrication, construction erection and installation of hydrothermal and nuclear power plants, and negotiating and/or carrying out contracts of such power plants and related components, among others based on the notarized and consularized Residence Certificate issued by Ministry of Foreign Affairs of Japan and consularized Articles of Incorporation of Mitsubishi-Japan. The company Mitsubishi-Japan is registered as a corporation and was licensed to do business in the Philippines based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission (SEC) on 11 December 2013. As a corporation licensed to do business in the Philippines, Mitsubishi-Japan maintains a branch, Mitsubishi Corporation-Manila Branch. On the other hand, Ayala-Philippines is a domestic corporation with office address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. IDcAHT It is further represented that Mitsubishi-Japan owns 11.97% of the authorized capital stock of Ayala-Philippines amounting to Sixty Three Million Seventy Seven Thousand Five Hundred Forty shares (63,077,540) and Thirty Two Million Six Hundred Forty Thousand Four Hundred Ninety Two (32,640,492) unlisted voting preferred shares since 29 July 2011. It is further presented that Mitsubishi-Manila Branch has no investments in Ayala-Philippines and that Mitsubishi-Japan directly acquired its share holdings from Ayala-Philippines without participation of Mitsubishi-Manila Branch based on an Affidavit executed by the Treasurer of Mitsubishi-Manila Branch. On 5 December 2013, Ayala-Philippines declared cash dividends amounting to Php2.40 per share to be distributed among the stockholders of record as of December 19, 2013 to be payable on 03 January 2014 based on the Secretary's Certificate issued by the Corporate Secretary of Ayala-Philippines. Further, on 3 January 2014, Mitsubishi-Japan remitted the amount of One Hundred Thirty Six Million Two Hundred Forty Seven Thousand Four Hundred Eighty Six Pesos and Forty Centavos (Php136,247,486.40) net of withholding Tax amount of Fifteen Million One Hundred Thirty Eight Thousand Six Hundred Nine Pesos and Sixty Centavos (Php15,138,609.60) based on a notarized Certification issued by Bank of the Philippine Islands as proof of remittance. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the Sworn Certification of Ayala-Philippines through its Corporate Secretary. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, dividends paid to Mitsubishi-Japan are subject to income tax at the rate of 30 percent, thus: "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%)." HCTAEc However, under Section 32 (B) (5) of the Tax Code, these 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: "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." For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "Article 10 Dividends 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 the 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; EScAHT 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. xxx xxx xxx 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." 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. Based on the above provisions, 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 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 (b) 15 percent in all other cases (paragraphs 1 and 2). However, the preferential rates do not apply if the recipient of dividends carries on business in the Philippines through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment (paragraph 5). Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS 2 (G.R. No. 76573 dated September 14, 1989), it was held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." HEcTAI Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 29 July 2011, Mitsubishi-Japan owns 11.97% shares in Ayala-Philippines, which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividends paid by Ayala Corporation to Mitsubishi Corporation are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended in relation to the ruling of the Supreme Court in the Marubeni case. 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 PH-Japan tax treaty. 2. G.R. No. 76573, September 14, 1989. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.