ITAD BIR Ruling No. 346-13

December 9, 2013 ITAD BIR RULING NO. 346-13 Article 10, Philippines-Japan tax treaty Mabuhay Vinyl Corporation 3rd Floor, Philamlife Salcedo Center 126 L.P. Leviste Street Salcedo Village Makati City Attention: Mr. Michael S. Yu Treasurer and Assistant Vice President Corporate Planning Gentlemen : This refers to your application for tax treaty relief filed on May 9, 2013 requesting confirmation that dividends paid by Mabuhay Vinyl Corporation ("Mabuhay Vinyl") to Tosoh Corporation ("Tosoh") 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 Tosoh 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 Tokuyama Tax Office in Japan on May 14, 2013. Tosoh is located at 4560 Kaisei-cho, Shuunan-shi, Yamaguchi, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on May 16, 2013, Tosoh is not registered as a corporation or partnership in the Philippines. On the other hand, Mabuhay Vinyl is a domestic corporation situated at 3rd Floor, Philamlife Salcedo Center, 126 L.P. Leviste Street, Salcedo Village, Makati, Philippines. According to the two Secretary's Certificates issued on June 6, 2013 and May 9, 2013, the Board of Directors of Mabuhay Vinyl (during a special meeting on April 25, 2013) declared cash dividends amounting to P0.05 per share in favor of the company's stockholders of record as of May 24, 2013, and payable not later than June 20, 2013. As of record date, Tosoh holds 39.92 percent of the total shares of stock of Mabuhay Vinyl as described below: Stockholder Number and Value of Shares Mode of Acquisition Acquisition Date Percentage of Ownership Tosoh 177,397,486 By purchase Oct. 4, 2000 39.92 percent 1,429,261 By purchase Jan. 5, 2001 9,093,539 By purchase Sep. 17, 2002 44,520,000 By purchase Mar. 21, 2006 31,566,520 By tender offer Jan. 20, 2010 Total 264,006,806 (P264,006,806.00) Based an the Certification issued by Mizuho Bank Ltd. Manila Branch 2 on September 30, 2013, such dividends were remitted by Mabuhay Vinyl to Tosoh as follows: Date of Remittance Reference Number Gross Amount Net Amount After Withholding Tax Sep. 24, 2013 OTT767924001 US$293,678.88 US$263,903.00 (P12,745,663.35) (P11,453,390.21) Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines . (A) Gross Income from Sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends . The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, 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: CDaTAI "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%)." 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: DIETHS 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; b) 15 per cent of the gross amount of the dividends in all other cases. SAHITC xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." 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 Tosoh holds directly at least 10 percent of the total shares of Mabuhay Vinyl during a period of six months immediately preceding the date of payment of the dividends on September 24, 2013, where Tosoh actually holds 39.92 percent of these shares since January 20, 2010 ,such dividends paid by Mabuhay Vinyl to Tosoh 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. CTaSEI 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 . 2. Located at 26th Floor, Citibank Tower, Valero Street corner Villar Street, Salcedo Village, Makati, Philippines.