ITAD BIR Ruling No. 343-13

December 9, 2013 ITAD BIR RULING NO. 343-13 Article 10 (Dividends), Philippines-Japan tax treaty Mitsubishi Corporation Manila Branch 14th Floor, L.V. Locsin Building, 6752 Ayala Avenue, corner Makati Avenue, Makati City Attention: Kiyoshi Takagi Authorized Representative Gentlemen : This refers to your application for tax treaty relief (TTRA) dated 30 January 2013 requesting confirmation that cash dividends paid by Ayala Corporation ("Ayala-Philippines") to Mitsubishi Corp. ("Mitsubishi-Japan") 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") . 1 SITCEA It is represented that Mitsubishi-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan based on a notarized and consularized Residence Certificate issued by the Kojimachi Tax Office of Japan and is a company engaged in the business of (1) purchasing, selling and trading such commodities as fuel products, metals, machinery, food, fertilizers, textiles, lumber, chemical products and rubber (2) development, exploration, production, manufacturing, processing, waste treatment, recovery and recycling of the aforementioned items; and (3) other business purposes based on the notarized and consularized Articles of Incorporation of Mitsubishi-Japan . The company Mitsubishi-Japan is licensed to do business in the Philippines on 20 March 1967 based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on 25 March 2013 although according to the notarized affidavit executed by the treasurer of Mitsubishi Corporation-Manila Branch ("Mitsubishi-Manila"), Mitsubishi-Manila has no investments in Ayala-Philippines and that Mitsubishi-Japan directly acquired the shares from Ayala-Philippines without the participation of Mitsubishi-Manila . Ayala-Philippines , on the other hand, is a domestic corporation with office address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that Mitsubishi-Japan owns Sixty Three Million Seventy Seven Thousand Five Hundred Forty (63,077,540) common shares and Thirty Two Million Six Hundred Forty Thousand Four Hundred Ninety Two (32,640,492) unlisted voting preferred shares or 12.0598% of the authorized capital stock of Ayala-Philippines amounting based on a notarized Secretary's Certificate issued by the Corporate Secretary of Ayala-Philippines . The Secretary's Certificate further states the acquisition by Mitsubishi-Japan of the shares from Ayala-Philippines as follows: Date of Issuance Mode of Acquisition Certificate Number Number of Shares 05 December 2005 Original Issuance 54245 19,647,239 05 December 2005 Original Issuance 54246 16,755,968 05 December 2005 Original Issuance 54247 10,000 05 December 2005 Original Issuance 54248 10,000 05 December 2005 Original Issuance 54249 10,000 05 December 2005 Original Issuance 54250 10,000 05 December 2005 Original Issuance 54251 10,000 05 December 2005 Original Issuance 54252 10,000 05 December 2005 Original Issuance 54253 10,000 05 December 2005 Original Issuance 54254 10,000 05 December 2005 Original Issuance 54255 10,000 05 December 2005 Original Issuance 54256 5,000 05 December 2005 Original Issuance 54257 5,000 18 June 2007 Dividend 57444 3,929,448 18 June 2007 Dividend 57445 3,371,193 23 May 2008 Dividend 73454 4,715,337 23 May 2008 Dividend 73455 4,045,432 29 July 2011 Dividend 82475 5,658,405 29 July 2011 Dividend 82476 4,854,518 On 14 December 2012, Ayala-Philippines declared cash dividends from the unrestricted retained earnings of Ayala-Philippines as of 31 December 2012 in the amount of Two Pesos (Php2.00) per share to all outstanding common shares of record as of 08 January 2013 and payable on 01 February 2013 based on a notarized Secretary's Certificate issued by the Corporate Secretary of Ayala-Philippines . cHaDIA Further, on 01 February 2013, Ayala-Philippines remitted the amount of One Hundred Thirteen Million Five Hundred Thirty Nine Thousand Five Hundred Seventy Two Pesos (Php113,539,572.00) based on a notarized Certificate issued by the Bank of the Philippine Islands Stock Transfer Office, Makati City as proof of remittance. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Certification executed by the Corporate Secretary of Ayala-Philippines , Solomon M. Hermosura. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Mitsubishi-Japan are subject to income tax at the rate of 30 percent, thus: "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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these 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: "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." For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: aIAcCH "Article 10 Dividends 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 the 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 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." On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD'') Model Tax Convention on Income and on Capital (Condensed Version, July 17, 2008) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: cDIHES " 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) (Pages 156-157) Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , dividends derived by a foreign corporation maybe effectively connected with its office in the Philippines if the business activities that give rise to such dividends are conducted through the said office, thus: " 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 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 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 ." (Underscoring supplied) Accordingly, the holdings in respect of the dividends paid by Ayala-Philippines to Mitsubishi-Japan are not effectively connected with Mitsubishi-Manila since they are not paid in respect of holdings forming part of the assets of Mitsubishi-Manila , or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through Mitsubishi-Manila . This is because: 1) Mitsubishi-Manila has no investments nor owns shares of stock in Ayala-Philippines ; 2) Mitsubishi-Manila does not use nor hold for use any shares of stock in Ayala-Philippines in the conduct of its trade or business; 3) the head office of Mitsubishi-Japan in Japan acquired such shares in the Philippines directly and without the participation of Mitsubishi-Manila ; and 4) dividends arising from these shares inure to the sole benefit of Mitsubishi-Japan and Mitsubishi-Manila did not receive any of these dividends thus, Mitsubishi-Manila is not a material factor in the realization of dividends received by Mitsubishi-Japan . IESTcD Based on the above-quoted 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% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividend, during the period of 6 months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15% in all other cases. Considering that more than six (6) months immediately preceding the date of payment of cash dividend or since 29 July 2011, Mitsubishi-Japan owns 12.06% shares in Ayala-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, this Office is of the opinion and so holds that the dividends paid by Ayala-Philippines to Mitsubishi-Japan is subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) 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. As amended by the 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.