ITAD BIR Ruling No. 332-11

December 23, 2011 ITAD BIR RULING NO. 332-11 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 Yutaka Manufacturing (Philippines), Inc. 110 North Science Avenue, Laguna Technopark Bian, Laguna Attention: Atty. Ma. Fatima Ungson-Lui Partner Gentlemen : This refers to your tax treaty relief application filed on July 30, 2009, on behalf of Yutaka Giken Co., Ltd. ("Yutaka-Japan") , on the dividend payment made by Yutaka Manufacturing (Philippines), Inc. ("Yutaka-Phil") to Yutaka-Japan pursuant to Article 10 (2) (a) 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 ("Philippines-Japan tax treaty, as amended"). It is represented that Yutaka-Japan is a corporation organized and existing under the laws of Japan with principal address at 508-1, Yutaka Machi, Higashi ku, Hamamatsu City, Shizuoka Prefecture, Japan per Residence Certificate issued by the District Director of Hamamatsuhigashi Tax Office dated April 10, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 16, 2009; and that, on the other hand, Yutaka-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 110 North Science Ave., Laguna Technopark, Bian, Laguna 4024. It is further represented, per Secretary's Certificate issued by Yutaka-Phil dated July 28, 2009, that Yutaka-Japan holds 529,995 common shares in Yutaka-Phil equivalent to an amount of PhP529,995,000.00, and which constitute 99.9990% ownership in Yutaka-Phil as of July 28, 2009; that during the special meeting of the Board of Directors of Yutaka-Phil on July 28, 2009, a resolution was adopted declaring cash dividends amounting to Twenty Million Six Hundred Thousand Pesos (Php20,600,000.00) out of Yutaka-Phil's retained earnings as of March 31, 2009 payable to all stockholders of records as of March 31, 2009 in proportion to their respective stockholdings on or before March 31, 2010. DCScaT It is finally represented 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 per Yutaka-Phil's affidavit dated July 28, 2009. 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 received 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%). xxx xxx xxx" 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. HTIEaS xxx xxx xxx" In relation thereto, 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. 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. 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. 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. CTHDcE xxx xxx xxx" Based on the aforeqouted 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, considering that Yutaka-Japan holds 99.999% ownership in Yutaka-Phil, and that Yutaka-Japan maintains this shareholdings for more than six months immediately preceding the date of payment of the dividends, such dividends paid by Yutaka-Phil to Yutaka-Japan are subject to the preferential tax rate of 10 percent based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-11 dated January 28, 2011) 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. TAIEcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue