ITAD BIR Ruling No. 286-13

September 26, 2013 ITAD BIR RULING NO. 286-13 Article 10, Philippines-Japan tax treaty SMC Yamamura Fuso Molds Corporation Governor Drive, Bo. De Fuego Barangay San Francisco, General Trias, Cavite Attention: Redentor I. Sioson Plant Manager Gentlemen : This refers to your tax treaty relief application filed on January 14, 2013 requesting for confirmation that dividends to be paid by SMC Yamamura Fuso Molds Corporation ("SMC PH") to Fuso Machine and Mold Manufacturing Company Limited ("Fuso JP") are subject to a preferential tax 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") . It is represented that Fuso JP is a foreign corporation organized and existing under the laws of Japan with its principal office address at 2-12-24, Hashimotodai, Midori-Ku, Sagamihara, Kanagawa, Japan based on its Certificate of Residence issued by the District Director of Sagamihara Tax Office, Japan on March 7, 2013; that Fuso JP is not registered in the Philippines based on the Certification issued by the Securities and Exchange Commission on February 4, 2013; and that on the other hand, SMC PH is a domestic corporation situated at Governor Drive, Bo. De Fuego Barangay San Francisco, General Trias, Cavite. It is further represented that on December 6, 2012, SMC PH, through its Board of Directors, passed and approved the declaration of cash dividends in the amount of PhP100,000,000.00 in favor of its stockholders of record as of December 31, 2012 based on the Certificate issued by the Corporate Secretary of SMC PH on March 6, 2013; that since April 6, 1995, Fuso JP holds 10,000 shares in SMC PH, representing 20% ownership in SMC PH, based on the same Secretary's Certificate; and that the said dividends were not yet remitted to Fuso JP as of February 18, 2013 based on the letter issued by the plant manager of SMC PH on even date. ScCDET 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 a non-resident foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). 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 . (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. THacES xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof provide: "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 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent n 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 percent 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. HIAESC 3. Notwithstanding the provisions of paragraph (2),the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. xxx xxx xxx" 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 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; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. In this case, considering that Fuso JP holds 20 percent of the outstanding capital stock of SMC PH during a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that such dividends to be paid by SMC PH to Fuso JP are subject to income tax at a preferential rate of 10 percent * based on 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. AaHcIT 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 effective January 1, 2009. n Note from the Publisher: As corrected in a revised ruling. Formerly "25 per cent".