ITAD BIR Ruling No. 330-13

December 2, 2013 ITAD BIR RULING NO. 330-13 Article 10 (Dividends), Philippines-Japan tax treaty Mitsui & Co. Mineral Resources Development (Asia) Corp. 22nd Floor, NAC Tower, 32nd St., Bonifacio Global City, 1634 Taguig City, Philippines Attention: Mr. Kunihiko Kobayashi Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 29 August 2013 requesting confirmation that dividends paid by Mitsui & Co. Mineral Resources Development (Asia) Corp. ("Mitsui-Philippines") to Mitsui & Co. Ltd. ("Mitsui-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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. 1 It is represented that Mitsui-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 1-2-1, Ohtemachi, Chiyoda-ku, Tokyo, Japan and is a company engaged in the business of foreign trade, purchase and sales relating to certain commodities; acquisition, planning, preservation, utilization and disposition of copyright, patents and other intellectual property; and information processing and supply, telecommunications, broadcasting, advertising, publishing, printing and translation businesses, among others, based on the notarized and consularized Residence Certificate issued by the Kojimachi Tax Office of Japan and Articles of Incorporation of Mitsui-Japan ; that Mitsui-Japan is doing business in the Philippines under the name of Mitsui & Co. Ltd. [Manila Branch] ("Mitsui-Manila") formerly known as Mitsui Bussan Kaisha, Limited (Mitsui Company Limited) based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on 28 August 2013; that Mitsui-Manila did not participate in the acquisition of shares of Mitsui-Philippines by Mitsui-Japan and that the funds used for the acquisition solely came from Mitsui-Japan based on the notarized Certification issued by the General Manager of Mitsui-Manila , Mr. Tetsuo Tomino. TEAICc Mitsui-Philippines , on the other hand, is a domestic corporation with office address at 22nd Floor, NAC Tower, 32nd St., Bonifacio Global City, Taguig City, 1634 and is primarily engaged in the business of investing, holding, selling or disposing of stocks, bonds, or any obligations or evidence of indebtedness based on the certified machines copy of the Amended Articles of Incorporation of Mitsui-Philippines . It is further represented that Mitsui-Japan owns 99.9995% of the authorized capital stock of Mitsui-Philippines amounting to Two Billion Nine Hundred Ninety Nine Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety Five (2,999,999,995) shares valued at Two Billion Nine Hundred Ninety Nine Million Nine Hundred Ninety Nine Thousand Nine Hundred Ninety Five Pesos (Php2,999,999,995.00) since 12 October 2010 by way of direct investment, based on the notarized Certification issued by the Corporate Secretary of Mitsui -Philippines. On 01 August 2013, Mitsui-Philippines declared cash dividends in the total amount of Two Million Five Hundred Thousand US Dollars (US$2,500,000.00) to be distributed among the stockholders of record on or before 31 October 2013 based on the Corporate Secretary's Certificate issued by the Corporate Secretary of Mitsui-Philippines . Further, on 26 September 2013, Mitsui-Philippines remitted the amount of Two Million Two Hundred Fifty Thousand US Dollars (US$2,250,000.00) based on a notarized Certification issued by Metrobank as proof of remittance. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Certification of Mitsui-Philippines Corporate Secretary, Atty. Rodolfo M. Bausa. DHCcST In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Mitsui-Japan are subject to income tax at the rate of 30 percent, thus: "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, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: IDCHTE 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." For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "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 the 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. CITSAc 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 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. On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 17, 2008) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: " 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) (Pages 156-157) HAISEa Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , dividends derived by a foreign corporation may be effectively connected with its office in the Philippines if the business activities that give rise to such dividends are conducted through the said office, 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 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 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 ." (Underscoring supplied) Accordingly, the holdings in respect of the dividends paid by Mitsui-Philippines to Mitsui-Japan are not effectively connected with Mitsui-Manila since they are not paid in respect of holdings forming part of the assets of Mitsui-Manila , or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through Mitsui-Manila . This is because: 1) Mitsui-Manila has no investments nor owns shares of stock in Mitsui-Philippines ; 2) Mitsui-Manila does not use nor hold for use any shares of stock in Mitsui-Philippines in the conduct of its trade or business; 3) the head office of Mitsui-Japan in Japan acquired such shares in Mitsui-Philippines directly and without the participation of Mitsui-Manila ; and 4) dividends arising from these shares inure to the sole benefit of Mitsui-Japan and Mitsui-Manila did not receive any of these dividends thus, Mitsui-Manila is not a material factor in the realization of dividends received by Mitsui-Japan . IcDHaT Based on the above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 12 October 2010, Mitsui-Japan owns 99.9995% shares in Mitsui-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividend paid by Mitsui-Philippines to Mitsui-Japan is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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. Protocol Amending the PH-Japan tax treaty.