ITAD BIR Ruling No. 316-15

December 7, 2015 ITAD BIR RULING NO. 316-15 Article 10, Philippines-Japan tax treaty, as amended Mitsubishi Corporation Manila Branch 14F LV Locsin Building 6752 Ayala Avenue corner Makati Avenue Makati City Attention: Kiyoshi Takagi Treasurer Gentlemen : This refers to your tax treaty relief application filed on December 23, 2014, requesting confirmation that the cash dividends paid by Ayala Corporation ("Ayala") to Mitsubishi Corporation ("Mitsubishi-Japan") are subject to 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 Mitsubishi-Japan is a resident of Japan for the purpose of the Philippines-Japan tax treaty per Residence Certificate issued on April 25, 2014 by the District Director of Kojimachi Tax Office; that it was licensed to established its branch office in the Philippines ("Mitsubishi-Philippine Branch") ; that per Affidavit dated December 17, 2014 issued by Mitsubishi-Philippine Branch, Mitsubishi-Philippine Branch has no investments nor owns shares of stocks with Ayala ; that Mitsubishi-Japan acquired the Ayala shares and the said acquisition was made directly by Mitsubishi-Japan ; that Mitsubishi-Philippine Branch likewise does not use or hold for use in the conduct of its trade or business any shares of stock in Ayala and consequently, all gains inured to the sole benefit of Mitsubishi-Japan and Mitsubishi-Philippine Branch did not received any of the gains; and that, on the other hand, Ayala is a corporation, organized and existing under the laws of the Philippines. ETHIDa It is further represented that during the regular meeting of the Board of Directors of Ayala held on December 4, 2014, the Board of Directors of Ayala declared cash dividend of P2.40 per share from its unappropriated retained earnings as of December 31, 2014, for the second semester of 2014, to all stockholders of Ayala's common shares as of December 18, 2014, and payable on January 3, 2015; that as of December 18, 2014, Mitsubishi-Japan is the registered shareholder of 63,077,540 common shares and 32,640,492 unlisted voting preferred shares which represents 11.6810 percent of the total issued and outstanding voting shares of Ayala ; and that these shares were acquired by Mitsubishi-Japan through various dates of acquisition since July 29, 2011. It is finally represented, per Sworn Certification dated December 16, 2014 issued by Ayala , 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. 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 income 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." The provisions of 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; 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. cSEDTC 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 Mitsubishi-Philippine Branch has neither investments nor any shares of stock in Ayala ; that Mitsubishi-Philippine Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office, Mitsubishi-Japan , of shares in Ayala ; that the said income is not paid or coursed through Mitsubishi-Philippine Branch ; that any dividend income derived from the said investment is directly recorded in the books of Mitsubishi-Japan ; and that Mitsubishi-Philippine Branch neither uses nor holds for use in the conduct of its trade or business any shares of stock of Mitsubishi-Japan in Ayala , then the subject dividend income of Mitsubishi-Japan cannot therefore be said to be attributable to Mitsubishi-Philippine Branch . In view thereof and considering that Mitsubishi-Japan is a resident corporation in Japan, which holds 11.6810 percent or more than 10 percent of the total issued and outstanding voting shares of Ayala for a period of 6 months immediately preceding the date of payment of the dividends or since July 29, 2011, said dividends paid by Ayala to Mitsubishi-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.