ITAD BIR Ruling No. 348-15

December 7, 2015 ITAD BIR RULING NO. 348-15 Article 10 (2) (a), Philippines-Japan tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. J.R. Vergara Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on March 26, 2014, on behalf of STT, Inc. ("STTJ") , requesting confirmation that dividends paid by STT (Philippines), Inc. ("STTP") to STTJ are subject to 10 percent preferential tax rate 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 Protocol 1 ("Philippines-Japan tax treaty, as amended") . HTcADC It is represented that STTJ is a resident of Japan per Certificate of Residence issued by the District Director of Hiratsuka Tax Office on March 13, 2014; that STTJ is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 20, 2014; and that STTP, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented, that at the special meeting of the Board of Directors of STTP on March 3, 2014, the Board declared cash dividends amounting to US$250,000.00 in favor of all the stockholders of record as of March 3, 2014, payable on March 28, 2014. It is further represented that STTJ is the registered owner of 34,995 shares of stock and the beneficial owner, through its nominees, of 5 shares of outstanding stock of STTP with par value of P100.00 per share for a total par value of P3,500,000.00 representing 99.99% of the outstanding and voting shares of STTP; and that these shares were acquired by STTJ upon incorporation on March 10, 1998 and increased thru stock dividends since June 5, 2003. It is finally represented, based on the Sworn Statement issued by STTP on March 21, 2014, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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, rents, royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). aScITE xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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 relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: "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; HEITAD 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. 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. 4. 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. 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. 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 of the gross amount of the dividends if (i) the beneficial owner is a company which holds directly at least 10 percent 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, or (ii) the dividends are paid by a company, being a resident of the Philippines, which is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent of the gross amount of the dividends, in all other cases. ATICcS This being the case, inasmuch as STTJ is a resident of Japan with no fixed place of business in the Philippines, and holds directly 99.99% of the outstanding capital stock of STTP (which in fact exceeds the minimum required percentage of holding of 10 percent), and since STTJ has maintained such shareholdings since June 5, 2003, and, in effect, more than six months immediately preceding the date of payment of the dividends, such dividends paid by STTP to STTJ are subject to income tax at the rate of 10 percent of 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 foregoing 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 treaty took effect on January 1, 2009.