ITAD BIR Ruling No. 276-14

October 10, 2014 ITAD BIR RULING NO. 276-14 Article 10, Philippines-Japan tax treaty, as amended Sanko Plastics Philippines, Inc. 404 M. H. Del Pilar Street Maysilo, Malabon, Manila Attention: Ms. Virginia L. Co Corporate Secretary Gentlemen : This refers to your application for tax treaty relief filed on December 19, 2013 requesting confirmation that dividends paid by Sanko Plastics Philippines, Inc. ("Sanko Plastics") to Sanko Corporation ("Sanko") (also known as Sanko Co., Ltd.) 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended"). Facts Sanko is a corporation organized and existing under the laws of Japan and is a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Gifu-Kita Tax Office in Japan on December 26, 2013. Sanko is located at 474-1 Honden, Mizuho, Gifu, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on November 22, 2013, Sanko is not registered as a corporation or partnership in the Philippines. On the other hand, Sanko Plastics is a domestic corporation situated at 404 M. H. Del Pilar Street, Maysilo, Malabon, Manila, Philippines. Based on the Secretary's Certificate issued on December 21, 2013, the Board of Directors of Sanko Plastics, during a meeting on December 12, 2013, declared cash dividends amounting to P0.30 per share or an aggregate amount of P3,000,000.00 in favor of the company's stockholders of record as of December 16, 2013, and payable on or before December 27, 2013. As of record date, Sanko holds 2,000,000 shares of stock or 20 percent of the total shares of stock of Sanko Plastics. Sanko acquired these shares on October 19, 1998. CSDcTA Finally, the dividend subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceeding, or judicial appeal, based on the Certification issued by the Corporate Secretary of Sanko Plastics on December 18, 2013. 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%)." 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: aCATSI "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." 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 Sanko holds directly 20 percent of the common shares and total shares of Sanko Plastics since October 19, 1998, which is above the minimum 10 percent shareholding and more than the minimum six month holding period, such dividend paid by Sanko Plastics to Sanko 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. IESTcD 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.