ITAD BIR Ruling No. 344-13

December 9, 2013 ITAD BIR RULING NO. 344-13 Article 10, Philippines-Japan tax treaty Integrated Micro Electronics, Inc. North Science Avenue, SPEZ, LTI Attention: Shigeru Ochiat Gentlemen : This refers to your tax treaty relief application filed on May 10, 2013 requesting for confirmation that dividends paid by Integrated Micro Electronics, Inc. ("IMEI") to SIIX Corporation ("SIIX") are subject to a preferential tax rate of 15 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") . DaHISE It is represented that SIIX is a foreign corporation organized and existing under the laws of Japan with its principal office address at 1-4-9 Bingo-machi, chuo-ku, Osaka, Japan based on its Certificate of Residence issued by the District Director of Higashi Tax Office, Japan on March 5, 2013; that SIIX is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on March 13, 2013; and that on the other hand, IMEI is a domestic corporation with address at North Science Avenue, SPEZ, LTI. It is further represented that on December 10, 2012, IMEI, through its Board of Directors, passed and approved the declaration of dividends to all shareholders of IMEI holding preferred shares, at the dividend rate and other details as follows: Rate Period Date Date Outstanding Amount Shares First 8.25% p.a. November 10 business February 21, 2013 1,300,000,000 PhP27,110,416.67 Quarter 23, 2012 to days before February 21, payment 2013 date Second 8.25% p.a. February 22, 10 business May 21, 2013 1,300,000,000 PhP26,514,583.33 Quarter 2013 to May days before 21, 2013 payment date Third 8.25% p.a. May 22, 10 business August 23, 2013 1,300,000,000 PhP28,004,166.67 Quarter 2013 to days before August 9, payment 2013 date Fourth 8.25% p.a. August 24, 10 business November 22, 2013 1,300,000,000 PhP27,110,416.67 Quarter 2013 to days before November payment 22, 2013 date based on the Certificate issued by the Corporate Secretary of IMEI on January 16, 2013; and that, as of December 31, 2012, SIIX is the legal and beneficial owner of the following preferred shares of IMEI representing 0.4651% of the total outstanding preferred shares: Number of shares Value Mode of Acquisition Date of Acquisition 6,047,392 PhP6,047,392.00 Original issuance November 24, 2008 In reply, please be informed that Section 14 of Revenue Memorandum Order No. (RMO) 72-2010 2 which took effect on November 4, 2010, provides that: " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO . " (emphasis supplied) Relative thereto, Section 13 (4) of the same RMO defines the first taxable event for purposes of filing the TTRA, to wit: CAIHTE "SEC. 13. Definitions . xxx xxx xxx 4. First taxable event for purposes of filing the Tax Treaty Relief Application (TTRA), shall mean the first or the only time when the income payor is required to withhold the income tax thereon or should have withheld taxes thereon had the transaction been subjected to tax; and for 0901-C applications, before the due date of the Documentary Stamp Tax (DST) on the sale of the shares of stock." (emphasis supplied) In this case, the TTRA was filed only on May 10, 2013 while the dividends were payable on February 21, 2013, May 21, 2013, August 23, 2013, and November 22, 2013. Accordingly, it did not comply with the requirement laid down in the RMO above-quoted, providing that the TTRA should be filed before the taxable event, specifically before payment of the dividends. Hence, any dividend payments made on or before May 10, 2013 shall be subject to 30 percent of the gross amount thereof pursuant Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, to wit: "Section 28. Rates of Income Tax on Foreign Corporations . (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, for dividend payments made on May 11, 2013 and thereafter , Section 32 (B) (5) of the 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 . (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. 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. ISCDEA 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. 2. 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" Based on the aforequoted 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 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. In this case, considering that SIIX holds 0.4651% of the total outstanding preferred shares of SIIX 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 IMEI to SIIX are subject to income tax at a preferential rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Japan tax treaty. 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. SHAcID 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. 2. Guidelines on the Processing Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties.