ITAD BIR Ruling No. 309-15

December 4, 2015 ITAD BIR RULING NO. 309-15 Article 10 (2) (a), Philippines-Japan tax treaty, as amended SMBC Metro Investment Corporation 20th Floor, Rufino Pacific Tower 6784 Ayala Avenue, Makati City Attention: Yukio Asahina President Gentlemen : This refers to your tax treaty relief application filed on January 8, 2015, requesting confirmation that dividends paid by SMBC Metro Investment Corporation ("SMBC-Phil") to Sumitomo Mitsui Banking Corporation ("SMBC-Japan") are subject to the preferential tax rate of 10 percent 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, as amended by Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that SMBC-Japan is a resident corporation of Japan within the meaning of the Philippines-Japan tax treaty based on the Certification of Residence issued by the District Director of K jimachi Tax Office dated March 8, 2013; that it was licensed to established its representative office in the Philippines ("SMBC-Japan Rep-Office") per the Securities and Exchange Commission Registration; that per Certification dated December 19, 2014 issued by SMBC-Japan Rep-Office , the cash dividends derived by SMBC-Japan are not effectively connected with the registered activities of SMBC-Japan Rep-Office ; and that, on the other hand, SMBC-Phil is a corporation organized and existing under the laws of the Philippines. It is further represented that at the Regular Meeting of the Board of Directors of SMBC-Phil held on December 4, 2014, the Board of Directors of SMBC-Phil approved the declaration of cash dividend of ten percent (10%) of the outstanding capital stock equivalent to Sixty Million Pesos (Php60,000,000.00) to stockholders of record as of December 4, 2014; that since August 16, 1995. SMBC-Japan invested the amount of Two Hundred Forty Million Pesos (Php240,000,000.00), in US Dollar equivalent, which represents 2,400,000 shares or forty percent (40%) of the total outstanding capital of SMBC-Phil. It is finally represented, per Sworn Statement dated December 19, 2014 issued by SMBC-Phil , 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. cHDAIS 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 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 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, 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" 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; ISHCcT 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. 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." Relative thereto, it was held by the Supreme Court in Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, considering the representation that the cash dividends derived by SMBC-Japan are not effectively connected with the registered activities of SMBC-Japan Rep-Office , then the subject dividends income of SMBC-Japan cannot therefore be said to be attributable to SMBC-Japan Rep-Office . In view thereof and considering that SMBC-Japan is a resident corporation in Japan, which holds 40 percent of the total outstanding capital of SMBC-Phil for a period of 6 months immediately preceding the date of payment of the dividends or since August 16, 1995, said dividends paid by SMBC-Phil to SMBC-Japan are subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of 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 Footnotes 1. Protocol amending treaty took effect on January 1, 2009.