ITAD BIR Ruling No. 278-14

October 10, 2014 ITAD BIR RULING NO. 278-14 Article 10 (2) (a), Philippines-Japan tax treaty, as amended FCC (Philippines) Corp. 106 North Science Avenue Laguna Technopark Bian, Laguna Attention: Michiharu Koyama President & General Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 22, 2013, requesting confirmation that dividend paid by FCC (Philippines) Corp. ("FCC Philippines") to F.C.C. Co., Ltd. ("FCC Japan") is 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, as amended 1 ("Philippines-Japan tax treaty"). It is represented that FCC Japan, with address at 7000-36, Nakagawa Hosoe-cho Kita-ku Hamamatsu-shi Shizuoka-ken 431-1394, Japan, is a corporation organized and existing under the laws of Japan, and is a resident of Japan per the Residence Certificate issued by the Chief of Taxation Office dated July 17, 2013; 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 July 22, 2013; and that, on the other hand, FCC Philippines is a corporation organized and existing under the laws of the Philippines, with principal address at 106 North Science Avenue, Laguna Technopark, Bian, Laguna. It is further represented, that at the special meeting of the Board of Directors of FCC Philippines held on August 7, 2013, a resolution was approved declaring cash dividends in the amount of Two Hundred Million Pesos (Php200,000,000.00) out of the unrestricted retained earnings as of March 31, 2013, payable on August 12, 2013; that based on the Corporate Secretary's Certificate of FCC Philippines issued on August 8, 2013, and that, FCC Japan owns a total capital stock of 199,994 shares as of March 31, 2013 which represents 99.997% ownership in FCC Philippines; and that, based on a Certification issued by RCBC Laguna Technopark Branch, such dividend was remitted to FCC Japan on August 12, 2013. caIEAD It is finally represented, per Certification dated July 19, 2013 issued by FCC Philippines, 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. (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. 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; ACTEHI 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." Based on the aforequoted 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 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 FCC Japan holds 99.997 percent ownership of FCC Philippines, and that FCC Japan held these shareholdings for more than six months immediately preceding the date of payment of the dividend or since February 13, 2012, the dividend paid by FCC Philippines to FCC Japan is 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. 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.