ITAD BIR Ruling No. 338-14

December 22, 2014 ITAD BIR RULING NO. 338-14 Article 10 Philippines-Japan tax treaty, as amended Jimenez Gonzales Bello Valdez Caluya & Fernandez JGLAW Sol Building, 112 Amorsolo Street Legaspi Village, Makati City Attention: Mr. Jose V.E. Jimenez Ms. Olivia P. Taganas Gentlemen : This refers to your application for tax treaty relief filed on July 28, 2014 requesting confirmation that dividends paid by Sagara Metro Plastics Industrial Corporation ("SMPIC") to Sagara Plastics Industrial Co., Ltd. ("SPICL") 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 a Protocol. 1 Facts SPICL is a corporation organized and existing under the laws of Japan and is a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Iwata Tax Office in Japan on May 21, 2014. SPICL is located at 1120, Hirooka-Fukuroi-Shi, Shizuoka-Ken, Japan. Based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 19, 2014, SPICL is not registered as a corporation or partnership in the Philippines. On the other hand, SMPIC is a domestic corporation situated at Barangay Paciano Rizal, Calamba City, Laguna, Philippines. According to the Secretary's Certificate issued on July 25, 2014, the Board of Directors of SMPIC, during a regular meeting on July 9, 2014, declared cash dividends amounting to P1,380,000.00 in favor of the company's stockholders of record as of July 10, 2014, and payable on July 30, 2014. The dividends will be taken out of the unappropriated retained earnings of SMPIC. As of record date, SPICL holds 88.43 percent of the total shares of stock issued and outstanding by SPICL as described below: cASEDC Stockholder Number and Value of Shares Mode of Acquisition Acquisition Date Percentage of Ownership SPICL 360 Subscription September 18, 1989 88.43 percent 17,626 Subscription September 21, 1989 38,374 Subscription February 2, 1990 25,000 Subscription June 8, 1993 TOTAL 81,360 (P81,360,000.00) Based on the Certification issued by the Bank of the Philippine Islands, SMPIC remitted such dividends to SPICL on July 30, 2014. Finally, the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceeding, or judicial appeal, based on the Sworn Statement issued by the President of SMPIC on May 14, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, 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: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." HDCAaS 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: 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; SDHAcI b) 15 percent of the gross amount of the dividends in all other cases." 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 SPICL holds directly at least 10 percent of the total shares of SMPIC during a period of six months immediately preceding the date of payment of the dividends, where SPICL actually holds 88.43 percent of these shares since June 8, 1993, such dividends paid by SMPIC to SPICL 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 Bureau 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. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.