ITAD BIR Ruling No. 317-13

December 2, 2013 ITAD BIR RULING NO. 317-13 Article 10, Philippines-Japan tax treaty Buag & Lotilla Law Offices Suites A&B, 10th Floor Strata 100 Building F. Ortigas, Jr. Road (Formerly Emerald Avenue) Ortigas Center, Pasig City Attention: Jose Mario C. Buag Walter Magnum D. Dela Cruz Gentlemen : This refers to your tax treaty relief application filed on August 28, 2012, requesting confirmation that dividends received by Mitsubishi Motors Corporation ("Mitsubishi Motors") from Asian Transmission Corporation ("Asian Transmission") are subject to income tax of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . 1 Facts It is represented that Mitsubishi Motors is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by Shiba Tax Office of Japan on July 13, 2012; that Mitsubishi Motors is situated at 33-8, Shiba 5-chome, Minato-ku, Tokyo, Japan; that Mitsubishi Motors is not registered as corporation in the Philippines per certification issued by the Securities and Exchange Commission dated August 2, 2012; and that, on the other hand, Asian Transmission is a corporation organized and existing under the laws of the Philippines with principal address at Carmelray Industrial Park, Canlubang, Calamba City, Laguna, Philippines; and that according to a certified true copy of Board of Investments (BOI) registration dated July 30, 2012, Asian Transmission , is registered with BOI under Certificate of Registration No. 73-291 dated October 17, 1973, as a preferred pioneer enterprise for the production/manufacture and export of Transmission Units with a registered capacity of 40,000 units per year. DCcSHE It is further represented that, based on the Certificate issued by the Corporate Secretary of Asian Transmission , a Board of Directors meeting of Asian Transmission was held last March 26, 2012, during the special meeting, it approved the declaration of cash dividends in favor of its stockholders amounting to One Hundred Ten Million Pesos (P110,000,000.00), payable on August 30, 2012; that as of the date of dividend declaration (from April 4, 2011), Mitsubishi Motors is a stockholder of record holding and owning a total of 407,626 common shares equivalent to 5.29% percent of the outstanding capital shares of Asian Transmission ; and that based on the notarized certificate of remittance issued by the Bank of Tokyo-Mitsubishi UFJ., Ltd. Manila branch, an outward remittance was dispatched on August 30, 2012 by order of Asian Transmission for the payment of dividend income to Mitsubishi Motors . It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by Asian Transmission dated August 15, 2012. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to Mitsubishi Motors , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . TAaIDH (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 interests, 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: CTSDAI 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 percent 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. CSTEHI 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 Under paragraph 3 of Article 10 above, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at the rate not to exceed 10 percent of the gross amount of the dividends if the dividends are paid by a company, being a resident of the Philippines, registered with the BOI and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines. In view thereof and considering that Asian Transmission is a domestic corporation registered with the BOI and engaged in pioneer areas of activities in the Philippines, such dividends paid by Asian Transmission to Mitsubishi Motors are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (3) of the Philippines-Japan tax treaty, as amended. DcAEIS 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. As amended by the Protocol Amending 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 effective January 1, 2009 .