ITAD BIR Ruling No. 329-12

September 3, 2012 ITAD BIR RULING NO. 329-12 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-031-11 Philippine Resins Industries, Inc. Unit 2104, Antel 2000 Corporate Center 121 Valero Street, Salcedo Village Makati City Attention: Mr. Tomoyuki Koike President Gentlemen : This refers to your tax treaty relief application filed on March 31, 2011, requesting confirmation that dividends paid by Philippine Resins Industries, Inc. ("Philippine Resins") to Tosoh Corporation ("Tosoh") and Mitsubishi Corporation ("Mitsubishi Japan") are subject to the preferential tax rate of 10 percent 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"). 1 It is represented that Tosoh is a foreign corporation organized and existing under the laws of Japan, with principal office at 4560 Kaisei-cho, Shuunan-shi, Yamaguchi 746-8501, Japan and is a resident thereof as shown in the Residence Certificate issued on February 2, 2011 by the District Director of Tokuyama Tax Office; 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 (SEC) dated March 2, 2011; that Mitsubishi Japan is a foreign corporation organized and existing under the laws of Japan, with principal office at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan and is a resident thereof as shown in the Residence Certificate issued on January 14, 2011 by the District Director of Kojimachi Tax Office; that Mitsubishi Japan was issued a license to engage in business in the Philippines on March 20, 1967 through a branch and to date, no petition for the withdrawal or cancellation of license has been filed per Certificate of Corporate Filing/Information issued by SEC dated February 14, 2011; that, on the other hand Philippine Resins is a domestic corporation with principal address at Unit 2104, Antel 2000 Corporate Center, 121 Valero Street, Salcedo Village, Makati City, Philippines; that Philippine Resins is registered with the Board of Investments (BOI) under Certificate of Registration No. DP 94-124 dated May 20, 1994; and that it has a pioneer status as a new producer of suspension type polyvinyl chloride (PVC) resin, with registered capacity of 60,000 metric tons per year (180 metric tons per day). IcSADC It is also represented in the Affidavit dated February 18, 2011 executed by Naoki Motoi, Treasurer of Mitsubishi Corporation Philippine Branch ("Mitsubishi Philippine Branch") that Mitsubishi Philippine Branch has no investments in Philippine Resins and does not own shares of stock in that corporation; that it does not use or hold for use in the conduct of its trade or business any shares of stock in the Philippine Resins; that Mitsubishi Japan acquired the shares in Philippine Resins and such acquisition was made directly by the former without the participation of Mitsubishi Philippine Branch ; that all gains inured to the sole benefit of Mitsubishi Japan and that Mitsubishi Philippine Branch did not receive any gain; and that Mitsubishi Philippine Branch is not a material factor in the realization of any gain received by Mitsubishi Japan . Moreover, it is represented that on March 17, 2011, the Board of Directors of Philippine Resins approved the declaration of cash dividend at Php0.50 per share to total outstanding Philippine Resins common shares of 72,400,000 as of February 28, 2011; that the total dividends of Php28,960,000 and Php7,240,000 shall respectively be paid to Tosoh and Mitsubishi Japan , on March 28, 2011; and that as per certification issued by the Corporate Secretary of Philippine Resins , Tosoh and Mitsubishi Japan hold 14,479,999 shares and 57,919,996 shares, respectively, constituting 19.999 percent and 80 percent of the issued and outstanding shares of Philippine Resins as of March 22, 2011. It is further represented that the issue or transaction subject of this request or 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 as per certification issued by the Philippine Resins dated March 30, 2011. Finally, the documents submitted as proof of actual payment of dividends show that on March 31, 2011, the amount of Php28,960,000.00 (USD601,870.45 at Php43.306 FX rate at time of remittance [PDS close 3/25/22]) was debited from the Savings Account of Philippine Resins in Mizuho Corporate Bank Ltd.-Manila branch and remitted to Tosoh on March 31, 2011; and that on the same date, the amount of Php7,240,000.00 (USD160,467.61 at Php43.306 FX rate at time of remittance [PDS close 3/25/22]) was likewise debited from the Savings Account of Philippine Resins in Bank of Tokyo-UFJ-Manila branch and remitted to the account of Tosoh . HTacDS In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, 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 . . ., dividends, . . .: 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 that any income derived by a foreign corporation may be exempt from income tax to the extent required by any treaty obligation binding upon the government of 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: 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 invoked 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. HAEDIS 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. 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. . . ." IaDSEA 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 exceeding 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. Accordingly, since Philippine Resins is a domestic corporation registered with the BOI and engaged in pioneer areas of activities in the Philippines, such dividends to be paid by Philippine Resins to Tosoh and Mitsubishi Japan are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD-031-11 dated January 28, 2011) Moreover, with respect to Mitsubishi Japan , while it has a branch office in the Philippines, Mitsubishi Philippine Branch , so that such dividends it received from Philippine Resins would be taxed as part of the income of Mitsubishi Philippine Branch, the Supreme Court, in MARUBENI CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS (G.R. No. 76573 dated September 14, 1989), (Marubeni ruling) laid down some conditions for this rule to apply, thus: "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." ITaESD Following the jurisprudence in the Marubeni ruling, this Office hereby holds that such dividends paid by Philippine Resins to Mitsubishi Japan shall be taxed as income of Mitsubishi Japan and not of Mitsubishi Philippine Branch and subject to the preferential rate of 10 percent pursuant to Article 10 (3) of the Philippines-Japan tax treaty, as amended by reason of the following: 1. Mitsubishi Philippine Branch has no investments in Philippine Resins and does not own shares of stock in that corporation; 2. Mitsubishi Philippine Branch does not use or hold for use in the conduct of its trade or business any shares of stock in Philippine Resins; 3. Mitsubishi-Japan acquired the shares in Philippine Resins and such acquisition was made directly by the former without the participation of Mitsubishi Philippine Branch; 4. Consequently, all gains in such undertaking inured to the sole benefits of Mitsubishi-Japan and that Mitsubishi Philippine Branch did not receive any such gains; and 5. Mitsubishi Philippine Branch is not a material factor in the realization of any gain received by Mitsubishi-Japan. This ruling is issued on the basis of the 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. Amending Protocol took effect on January 1, 2009.