ITAD BIR Ruling No. 309-13

November 13, 2013 ITAD BIR RULING NO. 309-13 Article 10, Philippines-Japan tax treaty Yutaka Manufacturing (Philippines), Inc. 110 North Science Avenue, Laguna Technopark Bian, Laguna Attention: Mr. Harushisa Iida President Gentlemen : This refers to your tax treaty relief application filed on August 13, 2012, requesting confirmation that the dividend income received by Yutaka Giken Co., Ltd. ("Yutaka-Japan") , from Yutaka Manufacturing (Philippines), Inc. ("Yutaka-Phil") , is subject to the preferential tax rate of 10% pursuant to Article 10 (2) (a) 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") . AaEDcS Facts It is represented that Yutaka-Japan is a corporation organized and existing under the laws of Japan with principal address at 508-1, Yutaka Machi, Higashi ku, Hamamatsu City, Shizuoka Prefecture, Japan per Residence Certificate issued by the District Director of Hamamatsuhigashi Tax Office dated July 19, 2012; that Yutaka-Japan is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated August 2, 2012; and that, on the other hand, Yutaka-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 110 North Science Ave., Laguna Technopark, Bian, Laguna 4024. It is further represented, per Secretary's Certificate issued by Yutaka-Phil dated July 26, 2012, that Yutaka-Japan holds 530,000 common shares of Yutaka-Phil equivalent to an amount of PhP530,000,000.00, representing 99.99% ownership in Yutaka-Phil since February 6, 2003; that during the special meeting of the Board of Directors of Yutaka-Phil on July 11, 2012, a resolution was adopted declaring cash dividends amounting to Seventeen Million Nine Hundred Seventy Six Thousand One Hundred Thirty Four Pesos (Php17,973,134.00) * out of Yutaka-Phil's retained earnings as of March 31, 2012 payable to all stockholders of records as of March 31, 2012 in proportion to their respective stockholdings of such date payable on or before March 31, 2013; and that based on the affidavit of remittance dated June 21, 2013, the dividend was remitted to Yutaka-Japan by Yutaka-Phil last September 27, 2012, as evidenced by the Rizal Commercial Banking Corporation telegraphic transfer application form as proof of actual payment. It is finally represented that the issue or transaction subject of this request for 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 per Yutaka-Phil's affidavit dated July 11, 2012. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends received 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 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%). ESITcH 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: 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" In relation thereto, 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; 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. IDScTE 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 aforeqouted 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, considering that Yutaka-Japan holds 99.99% ownership in Yutaka-Phil, and that Yutaka-Japan maintains this shareholdings for more than six months (since February 6, 2003) immediately preceding the date of payment (September 27, 2012) of the dividends, such dividend paid by Yutaka-Phil to Yutaka-Japan is subject to the preferential tax rate of 10 percent based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. 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