ITAD BIR Ruling No. 292-14

October 10, 2014 ITAD BIR RULING NO. 292-14 Article 10, Philippines-Japan tax treaty Honda Trading Philippines Ecozone Corporation Phase 1 Panorama Compound Building 4 South Science Avenue Laguna Technopark Bian, Laguna Attention: Shigeru Ochiai Managing Director Gentlemen : This refers to your application for tax treaty relief application filed on March 15, 2012, requesting confirmation that the dividends to be paid by Honda Trading Philippines Ecozones Corporation ("Honda Phils") to Honda Trading Corporation ("Honda Trading") are subject to the preferential 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 ("Philippines-Japan tax treaty"). Facts It is represented that Honda Trading is a foreign corporation organized and existing under the laws of Japan with its principal office address at 1-2-3, Kitaayoma, Minato-ku, Tokyo, Japan, based on its Residence Certificate issued by the Azabu Tax Office dated February 2, 2012; that Honda Trading is not registered as a corporation or as a partnership based on the Certification issued by the Securities and Exchange Commission on March 8, 2011; and that on the other hand, Honda Phils is a domestic corporation situated at Phase 1 Panorama Compound Building 4 South Science, Avenue Laguna Technopark, Bian, Laguna. It is further represented that on February 6, 2012, the Board of Directors of Honda Phils authorized to disbursed and pay cash dividends amounting to P19,043,400.00 in favor of stockholder of record as of August 19, 2011, payable on March 12, 2012; that as of August 19, 2011, Honda Trading stockholdings in Honda Phils are as follows: cITaCS Type of Shares Number Par Value Mode of Date of Percentage of of Shares Acquisition Acquisition Ownership Common 110,995 P100.00 Original 2004 99.99% subscription 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 Honda Trading, 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%). 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. IATHaS xxx xxx xxx" For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Article 10 thereof, 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; 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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. Accordingly, considering that Honda Trading holds directly 99.99 percent of the total shares of stock of Honda Phils during the period of six months immediately preceding the date of payment of the dividends or since 2004, such dividends paid by Honda Phils to Honda Trading 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, as amended. aCTHDA 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