ITAD BIR Ruling No. 320-12

August 23, 2012 ITAD BIR RULING NO. 320-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 060-10; BIR Ruling No. ITAD 059-10 Mahle Filter Systems Philippines Corporation Block 8 Lot 5, 6, & 7 PEZA Drive, First Cavite Industrial Estate Barangay Langkaan, Dasmarias, Cavite Philippines Attention: Ms. Eleonor F. Ledesma Mr. Jun Yosho Mr. Satoshi Nomiyama Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on July 1, 2011 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 foreign corporation organized and existing under the laws of Japan and 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 July 29, 2011; 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 August 3, 2011; and that Mahle Phil on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at Block 8, Lot 5 to 7 PEZA Drive, PII, FCIE, Langkaan, Dasmarias, Cavite, Philippines. It is further represented that during the special meeting held on June 3, 2011, the Board of Directors of Mahle Phil approved a resolution declaring a cash dividend of Php4,380 per share or a total of Php450,045,000 payable on or before December 31, 2011 to all outstanding stockholders as of December 31, 2010; that as per Sworn Certification dated September 29, 2011, issued by the Corporate Secretary of Mahle Phil, Mahle Japan holds 102,749 shares of Mahle Phil constituting 99.99 percent ownership in the company; and that the said shares were acquired by Mahle Japan on various dates from 1996 to 2002. THAICD Finally, per the Account Statement Summary of Mahle Phil in Mizuho Corporate Bank-Manila branch, an equivalent foreign currency amount of JPY704,751,679 was remitted by Mahle Phil to Mahle Japan as dividend payment via telegraphic transfer on September 28, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "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%). xxx xxx xxx" However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: "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." Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "Article 10 DIVIDENDS 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. AECDHS 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" Based on the foregoing provisions, the Philippines may tax the dividends paid by a company which is a Philippine resident to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. In view thereof, and considering that Mahle Japan holds 102,749 shares of Mahle Phil constituting 99.99 percent ownership in the company, which is more than 10 percent of the issued and outstanding shares of Mahle Phil during the period of 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 10 percent preferential tax rate prescribed under Article 10 of the Philippines-Japan tax treaty, as amended (BIR Ruling No. ITAD 060-10 dated November 3, 2010; and BIR Ruling No. ITAD 059-10 dated November 3, 2010) . ScAHTI 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