ITAD BIR Ruling No. 279-14

October 10, 2014 ITAD BIR RULING NO. 279-14 Article 10, Philippines-Japan tax treaty Toyota Autoparts Philippines, Inc. Toyota Santa Rosa (Laguna) Comples Special Economic Processing Barangay Pulong Sta. Cruz Santa Rosa City, Laguna 4026 Attention: Leni N. Co Section Manager TCD Gen, Cost Comptroller, Budter & Treasury Gentlemen : This refers to your tax treaty relief application filed on 18 April 2012, requesting confirmation that dividends to be paid by Toyota Autoparts Incorporated ("Toyota Autoparts") to Toyota Motor Corporation ("Toyota Motor") are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) 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"). Facts It is represented that Toyota Motor, with principal address at 1, Toyota-Cho, Toyota City, Aichi 471-8571, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty, as evidenced by a Certificate of Residence issued by the District Director of Toyota Tax Office on October 20, 2011; that Toyota Motor was licensed to establish its representative office in the Philippines on June 1, 1984, but such license was later cancelled on July 9, 1990 per Certification of Corporate Filing/Information issued by the Securities and Exchange Commission dated April 26, 2011; and that, on the other hand, Toyota Autoparts is a corporation organized and existing under the laws of the Philippines with principal address at Barangay Pulong, Sta. Cruz, Sta. Rosa City, Laguna, Philippines. It is further represented that, on July 20, 2012, during the special meeting of the Board of Directors of Toyota Autoparts, declare a cash dividend amounting to Three Hundred Fifty Four Million Six Hundred Thousand Pesos (P354,600,000.00), for the fiscal year ending March 2012 which is equivalent to 75% of the Net Income after tax and payable on August 29, 2013 for the payment of 1st half and on September 27, 2013 for the payment of 2nd half; that based on Secretary Certificate dated May 8, 2014, Toyota Autoparts confirm the Toyota Motor stockholdings as follows: aHIDAE Subscribed Acquisition Date Mode of Percentage of Number of Shares Acquisition Ownership 1,799,995 12/12/1990 Capital 95% 950,000 9/25/1991 Infusion 1,688,445 9/25/1991 311,555 9/25/1991 1,900,000 2/21/1992 2,151,500 2/21/1992 698,500 2/21/1992 9,499,955 It is finally represented that the dividend subject of this request is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, used on the Certification issued by Toyota-Autoparts executed on April 19, 2012. Ruling 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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: aTcIEH "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." Ruling 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. 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. ScAHTI 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. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. In the instant case, considering that Toyota Motor owns 95% outstanding capital stock of Toyota-Autoparts (since February 1991) six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends paid by Toyota-Autoparts to Toyota Motor are subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to 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