ITAD BIR Ruling No. 282-15

October 16, 2015 ITAD BIR RULING NO. 282-15 Article 10, Philippines-Japan tax treaty Aranas Law Office Ground Floor Le Metropolis Building Corner Dela Costa and Tordesillas Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your tax treaty application filed on July 12, 2013, requesting confirmation that dividends paid by Epson Precision (Phils.) Incorporated ("Epson Precision") to Seiko Epson Corporation ("Seiko Epson") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income , as amended 1 ("Philippines-Japan tax treaty"). HTcADC Facts It is represented that Seiko Epson is a foreign corporation organized and existing under the laws of Japan; that Seiko Epson is a resident thereof within the meaning of the Convention to avoid double taxation between the Philippines and Japan per certificate of status of residence issued on December 14, 2012 with business address at 11F Shinjuku NS building, 2-4-1, Nishishinjuku, Shinjuku-ku, Tokyo, 163-0811, Japan; that Seiko Epson is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on January 25, 2013; and that, on the other hand, Epson Precision is a corporation duly organized and existing in accordance with the laws of the Republic of the Philippines with principal address at Lima Technology Center, Lipa, Batangas City, Philippines. It is also represented that Seiko Epson is the registered owner of 24,999,994 common shares of stock in Epson Precision as of June 30, 2013 (acquired since May 28, 2002), which represents approximately 99.99% of Epson Precision issued and outstanding shares; that on June 27, 2013, the Board of Directors of Epson Precision declared cash dividends amounting to US$14,000,000.00 payable to all stockholder of record as of June 30, 2013. It is further represented, per sworn certification issued on July 12, 2013 by the President of Epson Precision that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to Seiko Epson , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). aScITE xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such 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: "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" In reply, please be informed that Article 10 of the RP-Japan Tax Treaty provides as follows: "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; 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." HEITAD Under paragraph 2 of Article 10 above, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at the rate not to exceed 10 percent of the gross amount of the dividends if the dividends are paid by a company, being a resident of the Philippines, 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. Accordingly, considering that Seiko Epson holds directly 99.99 percent of the total shares of stock of Epson Precision or 99.99% during the period of six months immediately preceding the date of payment of the dividends or since May 28, 2002, such dividends paid by Epson Precision to Seiko Epson are subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. 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 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.