ITAD BIR Ruling No. 292-13

October 25, 2013 ITAD BIR RULING NO. 292-13 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Philinak Industries, Inc. Lima Technology Center Malvar, Batangas 4233 Attention: Shigefumi Mizutani General Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 12, 2010 , requesting for confirmation that the dividend payments of Philinak Industries, Inc. ("Philinak") to Gomunoinaki Co., Ltd. ("Gomunoinaki") are subject to 10 percent final withholding tax rate, and that Philinak 's dividend payments to the rest of its stockholders, namely, Mr. Masahiro Okamoto ("Mr. Okamoto"), Mr. Hiroshi Inaki ("Mr. Inaki"), Mr. Shigefumi Mizutani ("Mr. Mizutani") , are subject to 15 percent final withholding tax rate, pursuant to Article 10 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") . It is represented that Gomunoinaki , with principal address at 2-8-1 Kamimaezu, Naka-ku, Nagoya-shi, Aichi-ken, Nagoya, Japan 4608333, is a corporation organized and existing under the laws of Japan, and is a resident thereof under the provisions of the Philippines-Japan tax treaty per the Residence Certificate issued by the District Director of Nagoyanaka Tax Office on October 9, 2009; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated October 19, 2009; and that, Mr. Okamoto , with legal domicile at 1-76, Enjyaku town, Minato ward, Nagoya City, is a resident of Japan per the Residence Certificate issued by the Mayor of Obu City on August 23, 2011; that Mr. Inaki , with legal domicile at 19-1, Nanzan town, Mizuho ward, Nagoya City, is a resident of Japan per the Residence Certificate issued by the ward Mayor of Mizuho ward, Nagoya City on August 22, 2011; that Mr. Mizutani , with legal domicile at 536, Komazuka, Takehana town, Hashima City, is a resident of Japan per the Residence Certificate issued by the Mayor of Hashima City on September 2, 2009; that the abovementioned individuals are not registered to engaged in business in the Philippines per the Certification issued by the Department of Trade & Industry on September 6, 2011; and that, on the other hand, Philinak is a corporation organized and existing under the laws of the Philippines with principal address at Lima Technology Center Malvar, Batangas 4233. CaATDE It is further represented that at the regular meeting of the Board of Directors of Philinak held on February 26, 2010, a resolution was approved authorizing the declaration of cash dividends amounting to USD200,000.00 to its stockholders, payable on or before April 27, 2010; that based on the Certification issued by the Corporate Secretary of Philinak dated April 14, 2010, beginning April 28, 2005, Gomunoinaki owns 34,999,500.00 shares representing 23.33% of the paid up capital of Philinak ; and that Mr. Okamoto, Mr. Inaki , and Mr. Mizutani , individually owns one (1) share, each share representing 0.00007% of the paid-up capital of Philinak ; that based on a Certification issued by Mizuho Corporate Bank, Ltd. Manila Branch, an amount of Japanese Yen: Sixteen Million Seven Hundred Sixty-four Thousand Three Hundred Ninety-three (YEN16,764,393) was remitted by Philinak to Gomunoinaki on April 23, 2010 via telegraphic transfer to Sumitomo Mitsui banking Corporation; and that, based on the certification issued by Metrobank Lipa Ayala Branch, Philinak has remitted various outward remittances on June 11, 2013 to Mr. Okamoto, Mr. Inaki , and Mr. Mizutani , for their dividend shares for the year 2010 to 2013. ADHaTC It is finally represented per the Certification issued by Philinak dated September 22, 2010, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. In reply, please be informed that Sections 28 (B) (1) and 25 (B) of the National Internal Revenue Code (Tax Code) of 1997, as amended, apply, in general, to dividends derived by a nonresident foreign corporation and a nonresident alien individual not engaged in trade or business within the Philippines. They provide: "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 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%)." "Section 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. . . ." DCSETa 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: 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." In relation to a treaty, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked 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; STaAcC b) 15 per cent of the gross amount of the dividends in all other cases. 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. . . ." 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 of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. In view thereof and considering that Gomunoinaki holds directly 23.33% of the paid up capital of Philinak or more than the required minimum shareholdings of 10 percent, for not less than 6 months immediately preceding the date of payment or since April 28, 2005, said dividends paid by Philinak to Gomunoinaki are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. ISCDEA Moreover, dividends paid by Philinak to its three (3) Japanese individual shareholders namely, Mr. Okamoto, Mr. Inaki , and Mr. Mizutani , are subject to 15 percent preferential tax rate, pursuant to Article 10 (2) (b) of the same treaty. 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 of Internal Revenue