ITAD BIR Ruling No. 329-13

December 2, 2013 ITAD BIR RULING NO. 329-13 Article 10, Philippines-Japan tax treaty Yakult Philippines, Inc. 1461 Agoncillo corner Escoda Streets Ermita, Manila Attention: Mr. Alberto R. Dy Sun President Mr. Akira Onose Vice President Gentlemen : This refers to your tax treaty relief application filed on June 5, 2013 requesting confirmation that dividends paid by Yakult Philippines, Inc. ("Yakult Philippines") to Yakult Honsha Company Ltd. ("Yakult Honsha") are subject to income tax at the rate of 10 percent pursuant to 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 ("Philippines-Japan tax treaty") , as amended by Protocol . 1 Yakult Honsha is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and Certificate of Status of Taxable Person issued by the Shiba Tax Office in Japan on April 5, 2013. Yakult Honsha is located at 1-19 Higashi Shinbashi, 1-chome, Minato-ku, Tokyo, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 4, 2013. On the other hand, Yakult Philippines is a domestic corporation located at 1461 Agoncillo corner Escoda Streets, Ermita, Manila, Philippines. On May 27, 2013, the Board of Directors of Yakult Philippines approved a resolution declaring cash dividends of P360,000,000.00 in favor of the stockholders on record of the corporation as of May 30, 2013, and payable on July 1, 2013. Based on the Corporate Secretary's Certificate issued on May 24, 2013, Yakult Honsha holds 40 percent of the common shares of stock of Yakult Philippines , each share with a par value of P1.00, as described below: THcEaS Stockholder Number and Value of Shares Mode of Acquisition Acquisition Date Percentage of Ownership Yakult Honsha 2,999,995 By purchase Jun. 1, 1978 40 percent 1,000,000 By purchase Jun. 1, 1978 15 By purchase Oct. 24, 1981 6,799,980 By purchase Oct. 24, 1981 5 By purchase Jan. 4, 1984 350,000 By purchase Jun. 18, 1987 213,981 Stock dividend Mar. 1, 1995 636,019 Stock dividend Mar. 1, 1995 8,000,000 Stock dividend May 1, 1996 8,000,000 Stock dividend Feb. 7, 1997 1 By purchase Oct. 17, 1997 8,000,000 Stock dividend Feb. 25, 1998 8,000,000 Stock dividend Feb. 1, 1999 19,000,000 Stock dividend Jul. 1, 1999 1 By purchase Jun. 30, 2000 17,000,000 Stock dividend Aug. 31, 2000 40,000,000 Stock dividend Jun. 1, 2001 1 By purchase Jul. 1, 2002 40,000,000 Stock dividend July 2, 2003 1 By purchase Jun. 1, 2005 1 By purchase Jun. 1, 2005 80,000,000 Stock dividend July 25, 2006 120,000,000 Stock dividend May 30, 2011 360,000,000 Stock dividend Dec. 15, 2012 Total 720,000,000 Based on the Certification issued by Rizal Commercial Banking Corporation 2 on July 2, 2013, the dividends were paid by Yakult Philippines to Yakult Honsha as follows: Date of Amount Remitting Reference Number Receiving Remittance Bank Bank July 1, 2013 US$3,002,084.78 Rizal 0411000000344582 Mizuho Bank (P129,600,000.00) Commercial Ltd. Kyobashi Banking Branch in Corporation Japan Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends . The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: SaCIAE "SEC. 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 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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: EacHSA 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." With respect to a treaty, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 and 2, Article 10 thereof provide: "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 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." IDSETA Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends for a period of six months immediately preceding the date of payment of the dividends, and 15 percent in all other cases. Accordingly, since Yakult Honsha holds directly at least 10 percent of the total shares of Yakult Philippines during the period of six months immediately preceding the date of payment of the dividends on July 1, 2013 , where Yakult Honsha holds 40 percent of these shares since December 15, 2012 , such dividends paid by Yakult Philippines to Yakult Honsha are subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. 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. 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 . 2. Located at Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City, Philippines.