ITAD BIR Ruling No. 285-13

September 26, 2013 ITAD BIR RULING NO. 285-13 Article 10 (Dividends), Philippines-Japan tax treaty Castillo Laman Tan Pantaleon & San Jose The Valero Tower, 122 Valero St.,Salcedo Village, 1227 Makati City Attention: Maria Victoria D. Sarmiento Authorized Representative Gentlemen : This refers to your application for tax treaty relief (TTRA) dated 08 April 2013 requesting confirmation that cash dividends paid by Davao Central Chemical Corp. ("Davao Central-Philippines") to Mitsubishi Corp. ("Mitsubishi-Japan") 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 ("Philippines-Japan tax treaty") . It is represented that Mitsubishi-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan based on a notarized and consularized Residence Certificate issued by the Kojimachi Tax Office of Japan and is a company engaged in the business of (1) purchasing, selling and trading such commodities as fuel products, metals, machinery, food, fertilizers, textiles, lumber, chemical products and rubber (2) development, exploration, production, manufacturing, processing, waste treatment, recovery and recycling of the aforementioned items; and (3) other business purposes based on the notarized and consularized Articles of Incorporation of Mitsubishi-Japan .The company Mitsubishi-Japan is licensed to do business in the Philippines on 20 March 1967 based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on 25 March 2013 although according to the notarized affidavit executed by the treasurer of Mitsubishi-Philippines ,the shares owned by Mitsubishi-Japan were acquired directly from Davao-Central-Philippines and that Mitsubishi-Philippines has no investments in Davao Central-Philippines nor did it participate in any transaction between Mitsubishi-Japan and Davao Central-Philippines. Davao Central-Philippines ,on the other hand, is a domestic corporation with office address at Room 19, Tibungko, Davao City. HTaSEA It is further represented that Mitsubishi-Japan owns 20% of the authorized capital stock of Davao Central-Philippines amounting to Five Hundred Eighty Eight Thousand (588,000) shares valued with a total par value of Five Million Eight Hundred Eighty Thousand Pesos (Php5,880,000.00) as of 08 April 2013, and which were acquired by Mitsubishi-Japan by way of the subscription since 11 January 1999 based on the notarized Secretary's Certificate of Davao Central-Philippines . On 08 April 2013, Davao Central-Philippines declared cash dividends in the total amount of Six Million One Hundred Seventy Four Thousand Pesos (Php6,174,000.00) to be distributed among the stockholders of record as of fiscal year 2012 to be payable not later than on 10 April 2013 based on the notarized Secretary's Certificate issued by the Corporate Secretary of Davao Central-Philippines . Further, on 10 April 2013, Davao Central-Philippines remitted the amount of Two Million Seven Hundred Twenty Six Thousand Five Hundred Twelve Yen (2,726,512.00) based on a notarized Certificate of Remittance issued by Bank of Tokyo-Mitsubishi UFJ, Manila Branch 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 notarized Certificate of No Pending Case executed by the Corporate Secretary of Davao Central-Philippines ,Dina D. Lucenario. 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: aESTAI "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: * 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, 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. aCITEH 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; 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." cTaDHS Based on the above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividend, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 11 January 1999, Mitsubishi-Japan owns 20% shares in Davao Central-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 Davao Central-Philippines to Mitsubishi-Japan is 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. 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. SECIcT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue