ITAD BIR Ruling No. 287-14

October 10, 2014 ITAD BIR RULING NO. 287-14 Article 10, Philippines-Japan Tax Treaty, as amended Sun Logistics Technology, Inc. Sitio Aratan, Pulong, Sta. Cruz City Santa Rosa City Attention: Mr. Toshinari Fukatsu President Gentlemen : This refers to your tax treaty relief application filed on April 5, 2013, on behalf of San EI INDUSTRY CO. LTD. (" San Ei "), requesting confirmation that dividends paid by SUN LOGISTICS TECHNOLOGY, INC. (" Sun Logistics ") to San Ei are subject to the 10 percent preferential tax rate pursuant to 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"). It is represented that San Ei, with address at 10 Higashiura, Takaoka-cho, Toyota-shi, Aichi, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the District Director of Toyota Tax Office on February 28, 2013; that San Ei is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 19, 2013; that Sun Logistics, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Sitio Aratan, Pulong, Sta. Cruz City, Santa Rosa City; and that it is registered with the Board of Investments (BOI) as Pioneer "New Service Exporter in the Field of Packaging of Commodities for Export with Custom-made Packaging Materials for Automotive Part and Components," under Certificate of Registration No. EP96-378 registered on January 30, 1997. It is further represented that at its organizational meeting on March 22, 2013, the Board of Directors of Sun Logistics declared cash dividends in the amount of Fifteen Million Pesos (Php15,000,000.00) to be distributed in favor of all its stockholders of record, in proportion to their respective current equity holdings; that San Ei owns Seven Hundred Twenty Thousand (720,000) shares of stock or sixty percent (60%) of the entire stockholdings of Sun Logistics with details of acquisitions, as follows: CIAcSa Date Acquired No. of Shares Mode of Acquisition 11/19/1996 96,000 Initial capital 08/28/2002 336,000 Increase of capital 08/18/2009 288,000 Stock dividend Total shares 720,000 ======= and that the said dividends were paid to San Ei on May 24, 2013 as evidenced by a notarized sworn certification from the RCBC Bank dated May 31, 2013. Finally, it is represented that the transaction subject of the herein request for ruling is not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per the Sworn Statement issued by Sun Logistics dated October 15, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . . dividends, rents, royalties . . .: 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 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: TIHCcA 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 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." 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. DCHIAS 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, dividends paid to a company resident of Japan may be taxed at a preferential rate of 10 percent if the paying company which is a resident of the Philippines is registered with the BOI and engaged in preferred areas of investment under the investment incentives laws of the Philippines, or, if the beneficial owner of the dividends holds at least 10 percent of the voting shares of the paying company during the period of six months immediately preceding the date of payment of the dividend. In all other cases, the 15 percent preferential tax rate on gross dividends shall apply. In view of the foregoing, and since San Ei is a resident of Japan with no fixed of business in the Philippines, and holds directly 60 percent of the entire stockholdings of Sun Logistics (which in fact exceeds the minimum required percentage of holding of 10 percent), and since San Ei has maintained such holdings since November 19, 1996 to August 18, 2009, and, in effect, more than six months immediately preceding the date of payment of the dividend, said dividends paid by Sun Logistics to San Ei are subject to income tax at the rate of 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 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