ITAD BIR Ruling No. 306-11

December 2, 2011 ITAD BIR RULING NO. 306-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 Sycip Gorres Velayo & Co. 6720 Ayala Avenue 1226 Makati City Attention: Ms. Carolina Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on June 28, 2011 requesting confirmation that the dividends paid by Rio Tuba Nickel Mining Corporation ("Rio Tuba") to Sojitz Corporation ("Sojitz") are subject to the preferential rate of 15 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") , as amended by a Protocol effective January 1, 2009. It is represented that Sojitz is a foreign corporation organized and existing under the laws of Japan and is a tax resident of Japan, with principal office at 1-20 Akasaka, 6-chome, Minato-ku, Tokyo, Japan based on the Certification issued by the District Director of Azabu Tax Office dated June 16, 2011; that Sojitz is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation issued by the Securities and Exchange Commission on June 23, 2011; and that, on the other hand, Rio Tuba is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor NAC Centre, Dela Rosa corner Adelantado Street, Legaspi Village, Makati City, Philippines. It is further represented that on June 21, 2011 the Board of Directors of Rio Tuba declared cash dividends in the amount of One Billion Five Hundred Million Pesos (Php1,500,000,000.00) out of the unrestricted retained earnings as of December 31, 2010 in favor of all of Rio Tuba's shareholders on record as of June 1, 2011, payable on June 30, 2011; and that Sojitz holds 60,000,000 shares constituting 4 percent of the issued and outstanding shares of Rio Tuba since 1975 up to 2009. It is finally represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Vice President-Finance of Rio Tuba dated June 15, 2011. CTDacA In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "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%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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 finding upon the Government of the Philippines." Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "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. 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: DSHTaC 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. 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. xxx xxx xxx" 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 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, during the period of six 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 percent in all other cases. Accordingly, since Sojitz holds directly 4 percent of the total shares of stock of Rio Tuba during the period of six months immediately preceding the date of payment of the dividends, such dividends paid by Rio Tuba to Sojitz are subject to income tax at the rate of 15 percent of the gross amount thereof. (BIR Ruling ITAD 007-10 dated May 20, 2010; and BIR Ruling No. DA-ITAD 068-10 dated June 21, 2010.) 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. TEcAHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue