ITAD BIR Ruling No. 337-11

December 23, 2011 ITAD BIR RULING NO. 337-11 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-199-11 Nidec Development Philippines Corporation 136 North Science Avenue Extension SPEZ Laguna Technopark Bian, Laguna Attention: Josie Balagot President Gentlemen : This refers to your tax treaty relief application dated September 21, 2011, requesting confirmation that the dividends paid by Nidec Development Philippines Corporation ("Nidec Dev Phil") to Nidec Corporation ("Nidec Japan") are subject to preferential 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty" ) . It is represented that Nidec Japan is a foreign corporation organized and existing under the laws of Japan with its principal office address at 338 Tonoshiro-Cho, Kuze, Minami-ku, Kyoto, Japan based on its Certificate of Status of Taxable Person issued by the Chief of Shimogyo District Taxation Office on August 24, 2011; that Nidec Japan is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on September 6, 2011; and that on the other hand, Nidec Dev Phil is a domestic corporation situated at 136 North Science Avenue Extension, Special Economic Zone Laguna Technopark, Bian, Laguna. It is further represented that during a special meeting of the board of directors of Nidec Phil held on July 22, 2011, Nidec Dev Phil declared cash dividends in the amount of One Million Eight Hundred Thirty Six Thousand Six Hundred Sixty Pesos (PhP1,836,660.00) with par value of PhP35.00 to all 52,476 shares of both Class "A" and Class "B" of record as of March 31, 2011 payable on September 30, 2011 based on the Certificate issued by the Corporate Secretary of Nidec Dev Phil on September 16, 2011; that as of September 30, 2011, Nidec Japan holds 20,984 shares of stock or 40% since September 23, 1996 in Nidec Phil based on the Certification issued by the Corporate Secretary of Nidec Phil on October 14, 2011. CTDAaE 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, collection proceedings, or judicial appeal, based on the Certificate of No Pending Case issued by the same Corporate Secretary of Nidec Phil on September 20, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to Nidec Japan, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate 30 percent, thus: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the tax Code provides that such 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: "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. IACDaS xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2 and 3, 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. 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. xxx xxx xxx" (emphasis supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, beginning January l, 2009, at a rate not to exceed: (a) 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; (b) 10 percent if the dividends are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentive laws of the Philippines; and (c) 15 percent in all other cases. This being the case, and considering that Nidec Japan holds 40 percent of the total shares of Nidec Dev Phil during at least a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that such dividends paid by Nidec Dev Phil to Nidec Japan are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-199-11 dated July 26, 2011) . 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 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.