ITAD BIR Ruling No. 310-15

December 4, 2015 ITAD BIR RULING NO. 310-15 Article 10 (2) (a), Philippines-Japan tax treaty, as amended Mahle Filter Systems Philippines Corporation Block 8 Lot 5, 6, & 7 PEZA Drive First Cavite Industrial Estate Barangay Langkaan, Dasmarias Cavite 4114 Attention: Mr. Toshihiro Okubo President Gentlemen : This refers to your tax treaty relief application filed on November 11, 2013 requesting confirmation that the dividends paid by Mahle Filter Systems Philippines Corporation ("Mahle Phil") to Mahle Filter Systems Japan Corporation ("Mahle Japan") are subject to the 10 percent preferential tax rate pursuant to 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 Mahle Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Certificate of Residence issued by the Toshima Tax Office dated November 5, 2014; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated November 26, 2012; and that Mahle Phil , on the other hand, is a corporation duly organized and existing under the laws of the Philippines. It is also represented, that on November 5, 2013, the Board of Directors of Mahle Phil declared cash dividends in the amount of Fifty Million Pesos (Php50,000,000.00) to all stockholders on record as of October 31, 2013 to be distributed on November 27, 2013; that as of October 31, 2013, Mahle Japan holds 102,745 shares constituting 99.999 percent ownership of Mahle Phil ; and that the said shares were acquired by Mahle Japan on April 4, 2005 thru cash investments. It is finally represented, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, as amended, provides: cTDaEH "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 thereto, Article 10 of the Philippines-Japan tax treaty, as amended, 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. 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. 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. xxx xxx xxx" Based on the foregoing, 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. cSaATC In view thereof, and considering that Mahle Japan , a resident of Japan with no fixed place of business in the Philippines, directly holds 99.99 percent shares in Mahle Phil since April 4, 2005, or more than 6 months immediately preceding the date of payment of the dividends, this Office is of the opinion, and hereby holds, that the said dividends paid by Mahle Phil to Mahle Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2(a), Article 10 of the Philippines-Japan tax treaty, as amended. 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 of Internal Revenue