ITAD BIR Ruling No. 341-15

December 7, 2015 ITAD BIR RULING NO. 341-15 Article 10, Philippines-Japan tax treaty Lima Land, Inc. G/F Alsons Building, 2286 Roces Avenue Makati City Attention: William M. Tepora Finance Manager Gentlemen : This refers to your application for tax treaty relief dated May 29, 2013, requesting confirmation of your opinion that the dividends paid by Lima Land, Inc. ("Lima Land") to Marubeni Corporation ("Marubeni") are subject to the preferential tax 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 ("Philippines-Japan tax treaty") . TAacHE It is represented that Marubeni is a foreign corporation organized and existing under the laws of Japan; that it is a resident of Japan for tax purposes based on the Certification issued by the tax authority of Japan. It has been granted a license to do business in the Philippines by the Securities and Exchange Commission on March 20, 1967 per certification issued on April 3, 2013. Thus, it has a Philippine branch, Marubeni-Manila , whose main business is to participate in construction project, including government construction. Moreover, it is represented that Marubeni-Manila is not privy nor is it in any of Marubeni's investment in Lima Land . That the rights and obligations of Marubeni arising from the investment are solely for its account and are not connected with the business activity of Marubeni-Manila as certified by its General Manager on May 16, 2013. On the other hand, Lima Land is a domestic corporation, organized and existing under Philippine laws. It is further represented that Marubeni is the registered owner of Three Hundred Fifty Nine Million Nine Hundred Ninety-Nine Thousand Six Hundred (359,999,600) shares, excluding the Four Hundred (400) shares of the nominee directors, equaling to Three Hundred Sixty Million (360,000,000) shares since May 23, 1996 constituting Forty percent (40%) of the issued and outstanding shares of Lima Land . That during a meeting of the Board of Directors of Lima Land held on May 21, 2013, it declared cash dividends in the amount of One Hundred Thirty Million Pesos P130,000,000.00 in favor of its stockholders of record as of April 30, 2013 based on their respective shareholding to be paid on June 15, 2013 and September 30, 2013, respectively. 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 sworn Certificate of No Pending Case issued on May 28, 2013. 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 Marubeni 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%). HDICSa 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. 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. IDaEHC 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" (underscoring 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 1, 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. However, the preferential tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject dividend income is effectively connected to the said permanent establishment. Article 5 of the Philippines-Japan tax treaty, defines a "permanent establishment" in this wise: Article 5 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx A review of the documents submitted would show that Marubeni has an existing branch in the Philippines, Marubeni-Manila . As to whether the dividends paid by Lima Land to Marubeni is considered to have been made through a permanent establishment in the Philippines, the commentaries on the Organization for Economic Cooperation and Development (OECD) Model Tax convention on Income and on Capital 1 are relevant: DTCSHA ". . . the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but that are not attributable to the permanent establishment. This is a question on which there have historically been differences of view, a few countries having sometime ago pursued a principle of general "force of attraction" according to which income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable by them if the beneficiary had a permanent establishment therein even though such income was clearly not attributable to that permanent establishment. Whilst some bilateral tax conventions include a limited anti-avoidance rule based on a restricted force of attraction approach that only applies to business profits derived from activities similar to those carried on by a permanent establishment, the general force of attraction approach described above has now been rejected in international tax treaty practice. The principle that is now generally accepted in double taxation conventions is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the tax authorities of that country should look at the separate sources of profit that the enterprise derives from their country and should apply to each permanent establishment test , subject to the possible application of other Articles of Convention . . . ." Based on the above rationalization, the income paid to the head office of a foreign corporation which has a branch office in the Philippines shall not be subject to the preferential tax rate if the income is effectively connected to the said branch office. However, if the business transactions that created the income came from a separate and independent transaction from the branch in the Philippines, then such income shall be subject to the preferential tax rate under the treaty. As aptly put by the Supreme Court in Marubeni Corporation v. Commissioner of Internal Revenue , 2 the Court stated that: "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 that 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 of 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." (emphasis supplied) CScTED The attendant circumstances of this case reveals that the rights and obligations of Marubeni in its investment in Lima Land are solely for its own account, and are not in any way effectively connected with the business activity of Marubeni-Manila . Therefore, applying the rules presented above, the dividends paid by Lima Land to Marubeni cannot be considered as effectively connected with Marubeni-Manila . This being the case, and considering that Marubeni holds 40% of the total shares of Lima Land during 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 Lima Land to Marubeni 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. 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. OECD Model Tax Convention on Income and on Capital Condensed Version, Eighth Edition, 2010, p. 157. 2. G.R. No. 76573 September 14, 1989.