ITAD BIR Ruling No. 325-15

December 7, 2015 ITAD BIR RULING NO. 325-15 Article 10 (2) (a), Philippines-Japan tax treaty, as amended San Miguel Yamamura Asia Corporation KM 27, Aguinaldo Highway BO. Anabu II Imus, Cavite Attention: Mr. Yuki Uetaka Gentlemen : This refers to your tax treaty relief application filed on December 22, 2014, requesting confirmation that dividends paid by San Miguel Yamamura Asia Corporation ("SM Yamamura") to Nihon Yamamura Glass Co., Ltd. ("Nihon Yamamura") are subject to the 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 Nihon Yamamura is a resident corporation in Japan within the meaning of the Philippines-Japan tax treaty based on the Residence Certificate issued by the District Director of Amagasaki Tax Office dated December 1, 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 Securities and Exchange Commission dated January 21, 2015; and that, on the other hand, SM Yamamura is a corporation organized and existing under the laws of the Philippines. It is further represented that at the meeting of the Board of Directors of Nihon Yamamura held on December 4, 2014, a resolution was approved declaring cash dividends amounting to (i) Twenty-Nine Million Three Hundred Sixty-Three Thousand Two Hundred Fifty (Php29,363,250.00) in favor of the preferred stockholders as of the date of meeting, and (ii) Three Hundred Seventy Million (Php370,000,000.00) in favor of the common stockholders as of the date of meeting; that the dividends are payable in December 2014; that Nihon Yamamura owns an aggregate of 4,000,000 preferred shares with a total par value of P400,000,000.00; that together with the common shares issued to Nihon Yamamura and its nominee directors and the preferred shares, it represents 40 percent of the outstanding capital of stock of SM Yamamura ; that the said preferred shares was acquired by Nihon Yamamura on May 8, 2006. 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 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, 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. 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. xxx xxx xxx 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 aforequoted provisions, 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. In view thereof and considering that Nihon Yamamura , a resident of Japan with no fixed place of business in the Philippines, holds 40 percent of the outstanding capital of SM Yamamura for more than six months immediately preceding the date of payment of the dividends or since May 8, 2006, such dividends paid by SM Yamamura to Nihon Yamamura 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 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.