ITAD BIR Ruling No. 384-12

November 27, 2012 ITAD BIR RULING NO. 384-12 Article 10, Philippines-Japan tax treaty, as amended Fujitsu Ten Corporation of the Philippines 100 South Science Avenue Laguna Technopark Sta. Rosa City, Laguna Attention: Yukimi Muramatsu President Gentlemen : This refers to your tax treaty relief application filed on November 23, 2011, on behalf of Fujitsu Ten Limited ("FTL"), requesting confirmation that dividend payments made by Fujitsu Ten Corporation of the Philippines ("FTCP") to FTL are subject to 10 percent preferential tax rate pursuant to 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 ("Philippines-Japan tax treaty, as amended") . It is represented that FTL, with address at 2-28 Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan, is a resident of the Japan per Certificate of Residence issued by the District Director of Hyogo Tax Office on November 10, 2011; that FTL 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 November 16, 2011; and that FTCP, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 100 South Science Avenue, Laguna Technopark, Sta. Rosa, Laguna. It is also represented, per Secretary's Certificate dated November 15, 2011, that as of October 24, 2011 FTL owns 975,000, inclusive of the six (6) qualifying shares held in trust by the six (6) members of the Board of Directors with a par value of P100.00 per share, representing 75% of the outstanding shares of FTCP; and that these shares were acquired by FTL thru subscription on August 17, 1999. It is further represented that at the Meeting of the Board of Directors of FTCP on October 24, 2011, the Board declared a cash dividend in the amount Dollars Eight Million Seven Hundred Thirty-Two Thousand, United States Currency (US$8,732,000.00), out of the unappropriated retained earnings as of March 31, 2011 and paid on November 25, 2011 per Transaction Details from Bank of Tokyo-Mitsubishi UFJ. It is finally represented, based on the Sworn Statement issued by FTCP on November 22, 2011, 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. HACaSc 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%). 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. CaDSHE 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; 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. xxx xxx xxx 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 foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends. In all other cases, the 15 percent rate shall apply. This being the case, inasmuch as FTL holds directly 75% of the outstanding capital stock of FTCP (which in fact exceeds the minimum required percentage of holding of 10 percent), and since FTL maintains such holdings since August 17, 1999, and, in effect, more than six months immediately preceding the date of payment of the dividends, such dividends paid by FTCP to FTL 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. ISTECA 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