ITAD BIR Ruling No. 367-15

December 21, 2015 ITAD BIR RULING NO. 367-15 Article 10 (2) (a), Philippines-Japan tax treaty, as amended JG Law (Jimenez Bello Valdez Caluya & Fernandez) Attorneys & Counsellors At Law SOL Building, 112 Amorsolo Street, Legaspi Village 1229 Makati City Attention: Lory Anne P. Manuel-McMullin Ethelene G. Velasco Olivia P. Taganas Gentlemen : This refers to your tax treaty relief application filed on March 14, 2014, on behalf of Mitsuba Corporation ("Mitsuba-Japan"), requesting confirmation that dividends paid by Mitsuba Philippines Technical Center Corporation ("Mitsuba-Phil") to Mitsuba-Japan are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the amended 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"). aICcHA It is represented that Mitsuba-Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty based on the Certificate of Status of Taxable Person issued by the District Director of Kiryu Tax Office dated May 20, 2014; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 14, 2014; and that, on the other hand, Mitsuba-Phil is a corporation organized and existing under the laws of the Philippines. It is further represented that on January 16, 2014, the Board of Directors of Mitsuba-Phil declared cash dividends in the total amount of Six Million Two Hundred Ninety-One Thousand Six Hundred Pesos only (Php6,291,600.00) to all stockholders of record as of December 31, 2013, payable on March 17, 2014; that as of January 16, 2014, Mitsuba-Japan owns 640,895 common shares inclusive of five (5) nominal shares, with a total par value of Php64,089,500.00 which represents 100 percent ownership in Mitsuba-Phil ;that the shares was acquired by Mitsuba-Japan through various dates of subscription since January 27, 2012; and that the said dividends was remitted by Mitsuba-Phil to Mitsuba-Japan on March 19, 2014. It is finally represented, per Sworn Statement dated February 26, 2014 issued by Mitsuba-Phil ,that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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" Thus, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoke, 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. EHaASD 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 percent 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. xxx xxx xxx 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. In view thereof and considering that Mitsuba-Japan ,a resident of Japan with no fixed place of business in the Philippines, holds 99.99 percent ownership in Mitsuba-Phil for more than six months immediately preceding the date of payment of the dividends or since January 27, 2012, such dividends paid by Mitsuba-Phil to Mitsuba-Japan are subject to the preferential tax 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. DaIAcC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol amending treaty took effect on January 1, 2009.