ITAD BIR Ruling No. 333-12

September 3, 2012 ITAD BIR RULING NO. 333-12 Article 10 (2) (b), Philippines-Japan tax treaty, as amended Standard Chartered Bank Standard Chartered Bank Building 6799 Ayala Avenue, Makati City, Philippines Attention: Ma. Angelica R. Mira Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") received by this Office on 05 April 2010 , requesting confirmation that dividends paid by Philippine Long Distance Telephone Corporation ("PLDT") to The Nomura Trust and Banking Co. Ltd. as The Trustee of Nomura RAFI All Country Stock Fund ("Nomura Trust/RAFI") on 20 April 2010 are subject to fifteen percent (15%) preferential tax rate pursuant to Article 10 (2) (b) of 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, as amended ("Philippines-Japan tax treaty") . Facts It is represented that Nomura Trust/RAFI with address at 2-2-2, Otemachi; Chiyoda-ku, Tokyo, 100-00004 Japan is a resident company of Japan within the meaning of Article 4 of the Philippines-Japan tax treaty as evidenced by a Certificate of Residence issued by Yoshinobu Ono, District Director of Kojimachi Tax Office of Japan on 19 March 2010; that it is not a registered corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission on 31 March 2010; that PLDT, on the other hand, having its principal office address at Ramon Cojuangco Building, Makati Avenue, Makati City, is a corporation duly incorporated and organized under the laws of the Republic of the Philippines; and that Standard Chartered Bank Securities, through its Securities Services Department, and being the broker and/or custodian of the shares of Nomura Trust/RAFI, executed a Notarized Certification, certifying under oath that as of 17 March 2010, Nomura Trust/RAFI owns 380 shares representing 0.00020343% of the outstanding shares of common stock of PLDT. It is further represented, as certified by the Corporate Secretary of PLDT on 12 March 2010, that the Board of Directors of PLDT through a Board Resolution declared dividends in the amount of seventy six pesos (Php76.00) per outstanding share of common stock of PLDT, payable on 20 April 2010 to the holders of record of said stock at the close of business on 17 March 2010, and the proper officers of PLDT were authorized to cause the payment of the subject dividends, among others; and that the shares of stock, subject of the TTRA filed by Nomura Trust/RAFI are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. Ruling 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 non-resident foreign corporation. It provides: EAHDac "Section 28. Rates of Income Tax on Foreign Corporation . (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 provides that any income may be exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: "Section 32. Gross Income . (B) Exclusions from gross Income The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In your application, you invoked Article 10 of the Philippines-Japan tax treaty, as amended by Article III of its Protocol. It provides in part: "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. DcTaEH 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." xxx xxx xxx 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. xxx xxx xxx (Emphasis Supplied.) cETDIA Based on the afore-quoted provisions, insofar as the Philippines is concerned, the ten percent (10%) preferential tax rate on dividends applies when the following conditions concur: 1) the payer and recipient of the dividends are separately treated as a "company"; 2) the payer of the dividends is a resident of the Philippines; 3) the recipient of the dividends is a resident of Japan; 4) the recipient of the dividends is the beneficial owner thereof; 5) the recipient holds directly at least ten percent (10%) either of the voting shares or the total shares of the payer during the period of six (6) months immediately preceding the date of payment of dividends. In all other cases, the fifteen percent (15%) preferential rate shall apply. Considering that Nomura Trust/RAFI is a resident company of Japan, and holds 380 shares representing 0.00020343% of the outstanding shares of common stock of PLDT, which shareholdings are less than ten percent (10%) of the voting shares or total shares of the payer during the period of six (6) months immediately preceding the date of payment of dividends, this Office is of the opinion as it hereby holds that the dividends paid to Nomura Trust/RAFI by PLDT are subject to income tax in the Philippines at the rate of fifteen percent (15%) of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty . This ruling is issued on the basis of the facts 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