ITAD BIR Ruling No. 325-12

August 31, 2012 ITAD BIR RULING NO. 325-12 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD 337-11 Lima Land, Inc. Ground Floor, ALSONS Building 2286 Chino Roces Avenue Extension 1226 Makati City Attention: Mr. William M. Tepora Finance Manager Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on March 28, 2012 , on behalf of, Marubeni Corporation , requesting confirmation that the dividend payments of Lima Land, Inc. to Marubeni Corporation are subject to the preferential tax rate 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") . Facts It is represented that Marubeni Corporation is a corporation organized and existing under the laws of Japan and a resident thereof situated at 4-2, Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, Japan per Certificate of Residence issued by the Kojimachi Tax Office of Japan; that Marubeni Corporation was licensed to establish its branch office in the Philippines on March 20, 1967 and, to date, no petition for the withdrawal or cancellation of its license has been filed as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on February 24, 2011; and that, on the other hand, Lima Land, Inc. is a corporation organized and existing under the laws of the Philippines with principal address at Ground Floor, ALSONS Building, 2286 Chino Roces Avenue Extension, 1226 Makati City, Philippines. On March 14, 2012, the Board of Directors of Lima Land, Inc. declared cash dividends of P20,000,000.00 to the stockholders of record as of December 31, 2011 out of the retained earnings of the Lima Land, Inc. as of December 31, 2010 and payable on April 16, 2012 per Secretary's Certificate dated March 19, 2012; and that since January 9, 1996 and May 23, 1996, Marubeni Corporation's total stockholdings is 360,000,000 common shares with a par value of P1.00 per shares (inclusive of the shares held by its nominee director's), representing 40% of the outstanding stock of Lima Land, Inc. It is further represented that Marubeni Corporation-Manila Branch is not privy or involved in any way in the investment of Marubeni Corporation in Lima Land, Inc. and that the rights and obligations of Marubeni Corporation arising from said investments are solely for the account of Marubeni Corporation and are not in any way effectively connected with the business activity of the Manila Branch as per Sworn Statement of the General Manager of Marubeni Corporation Manila branch dated March 27, 2012. cEATSI It is finally represented, per Certification dated March 26, 2012 issued by Lima Land, Inc., 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. Ruling 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 . (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: cDIHES "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." 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; cDHAES 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. 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. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the latter company 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 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. In the instant case, considering that Marubeni Corporation holds 360,000,000 common shares, which represents 40% of the total outstanding stocks of Lima Land, Inc., this Office is of the opinion and so holds that the cash dividends paid by Lima Land, Inc. to Marubeni Corporation shall be subject to the preferential tax rate of 10 percent , based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 337-11 dated December 23, 2011) Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents (G.R. No. 76573 dated September 14, 1989), it was held 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 of the branch. Consequently, the taxpayer is 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." cHaCAS Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by Lima Land, Inc. to Marubeni Corporation shall be considered as income of Marubeni Corporation as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). 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