ITAD BIR Ruling No. 369-12

October 31, 2012 ITAD BIR RULING NO. 369-12 Article 10 (Dividends), Philippines-Japan tax treaty; BIR Ruling No. ITAD 332-11 Team Energy Corporation Grande Island, Ibabang Polo, Pagbilao, Quezon Attention: Kazunobu Takijima VP Controller Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 07 July 2011 requesting confirmation that the dividends paid by Team Energy Corporation (Team Energy) to Marubeni Corporation (Marubeni) are subject to the preferential tax treaty 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) . It is represented that Marubeni is a foreign corporation organized and existing under the laws of Japan with principal office at 4-2, Ohtemachi 1-Chome, Chiyoda-ku, Tokyo 100-8088, Japan, based on the Certificate issued by the District Director of Kojimachi Tax Office dated 24 December 2010. Marubeni was issued a license to do business in the Philippines on 20 March 1967 and to date, no petition for withdrawal or cancellation of license has been filed per Certificate of Corporate Filing/Information issued by SEC dated 17 March 2011. On the other hand, Team Energy is a corporation duly organized and existing under the laws of the Philippines with office address at Grande Island, Ibabang Polo, Quezon Province, Philippines. It is also represented in the Certification dated 03 October 2011 executed by Mr. Kazunobu Takijima, General Manager of Marubeni-Manila Branch in the Philippines that the dividend income received by Marubeni from Team Energy is neither connected with, nor resulting from the ordinary course of trade or business of Marubeni Corporation-Manila Branch . It is further represented that on 07 July 2011, the Board of Directors of Team Energy approved the declaration of dividends in the amount of US$6,000,000.00 payable to all the stockholders of record of Team Energy as of 07 July 2011. Marubeni holds 16,534,176 shares constituting 50% of the issued and outstanding shares of Team Energy and Marubeni directly holds its respective shares at least 6 months immediately preceding the date of payment on or before 31 July 2011 per Secretary's Certificate issued by the Corporate Secretary of Team Energy on 07 July 2011. THIcCA It is further represented that on 12 July 2011, Team Energy paid cash dividends to Marubeni based on a duly notarized Secretary's Certificate with attached Application for Remittance executed by the Corporate Secretary of Team Energy on 29 December 2011. 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, collection proceedings, or judicial appeal, based on a duly notarized Secretary's Certificate issued by the Corporate Secretary of Team Energy on 26 June 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended, 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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax or partially exempt, if subjected to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. The aforementioned provision of law states: "Section 32. Gross Income . cdll 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." Correlative to Section 32 (B) (5) of the NIRC of 1997, as amended is the Philippines-Japan tax treaty. Article 10 thereof provides: " 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. aSTAHD 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 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. xxx xxx xxx" 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 dividends, 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. ISTCHE Accordingly, since Marubeni holds directly 50% of the total shares of stock of Team Energy during the period of 6 months immediately preceding the date of payment of the dividends, this office is of the opinion and so holds, that dividends paid by Team Energy to Marubeni is subject to income tax at the rate of 10% of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended (BIR Ruling No. ITAD-332-11 dated 23 December 2011). 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