ITAD BIR Ruling No. 385-12

December 3, 2012 ITAD BIR RULING NO. 385-12 Article 10 (2) (a), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-11 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Romulo S. Danao, Jr. Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 28 June 2012, on behalf of Pacific Metals Co. Ltd. ("PAMCO-Japan") requesting confirmation that dividends to be paid by Rio Tuba Nickel ("RTN-Philippines") to PAMCO-Japan are subject to the preferential final withholding tax rate of 10 percent pursuant to Article 10 (2) (a) 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 ("Philippines-Japan tax treaty, as amended") . It is represented that PAMCO-Japan, with principal address at 6-1 Otemachi 1-chome Chiyoda-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty, as evinced by a Certificate of Residence issued by the District Director of Kjimachi Tax Office on 11 May 2012; that it was licensed to establish its representative office in the Philippines pursuant to which Pacific Metals Co.,Ltd.-Rep Office ("PAMCO-Rep Office") was established on 23 October 1970. On the other hand, RTN-Philippines is a corporation organized and existing under the laws of the Philippines with principal address at NAC Centre, Dela Rosa corner Adelantado Streets, Legaspi Village, Makati City 1229. It is further represented that during the meeting of the Board of Directors of RTN-Philippines held on 04 June 2012, a resolution was approved declaring a cash dividend in the amount of One Billion Five Hundred Million Pesos (P1,500,000,000.00),out of the unrestricted retained earnings as of 31 December 2011, in favor of all of RTN-Philippines shareholders of record as of 01 June 2012; that based on the Secretary's Certificate issued by RTN-Philippines dated 26 June 2012, as of 01 June 2012, PAMCO-Philippines owns 540,000,000 common shares acquired by purchase on various dates from 1975 to 2009, representing 36% ownership in RTN-Philippines; and that the subject dividends shall be paid on 30 June 2012; that based on the Certification issued by PAMCO-Rep Office dated 13 June 2012, it has no participation, directly or indirectly, in the investments of PAMCO-Japan in RTN-Philippines and that the dividend income received by PAMCO-Japan from the said investments is neither attributable to nor effectively connected with PAMCO-Rep Office, and any payment of dividends is directly remitted to PAMCO-Japan. DSAEIT It is represented that RTN-Philippines remitted the amount of Eleven Million Four Hundred Seventy Eight Thousand Five Hundred Seven US Dollars and Thirty Two Cents (US$11,478,507.32) in favor of PAMCO-Japan transmitted to the Bank of New York Mellon, New York, USA on 29 June 2012 through Security Bank based on the Notarized Certification issued by the First Vice President of Security Bank on 17 August 2012. It is finally represented, per the Sworn Statement issued by RTN dated 25 June 2012, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, 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 received 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%)." aSTAcH 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." In relation thereto, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, 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; AcTDaH 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." 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. However, under paragraph 5 of Article 10, the Philippines, being the source of the dividends, is not obliged to limit the tax rates on dividends under paragraphs 2 and 3 of the article if the holding in respect of which the dividends are paid is effectively connected with a permanent establishment which PAMCO-Japan has in the Philippines. Under paragraph 2 (b),Article 5 of the tax treaty, PAMCO-Rep-Office, as such, is considered a permanent establishment of PAMCO in the Philippines, thus: IDAaCc "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 1. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office ; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources." On the question of whether dividends are effectively connected with a permanent establishment, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, 17 July 2008) mention that such dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: "24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'.It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment .In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) (Pages 156-157) Similarly, following the Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated 14 September 1989), dividends derived by a foreign corporation may be effectively connected with its office in the Philippines if the business activities that give rise to such dividends are conducted through the said office, thus: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory .It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (Underscoring supplied) aDCIHE Accordingly, the holdings in respect of the dividends paid by RTN-Philippines to PAMCO-Japan are not effectively connected with PAMCO-Rep Office since they are not paid in respect of holdings forming part of the assets of PAMCO-Rep Office, or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through PAMCO-Rep Office. This is because: 1) PAMCO-Rep Office has no investments nor owns shares of stock in RTN; 2) PAMCO-Rep Office does use nor hold for use any shares of stock in RTN-Philippines in the conduct of its trade or business; 3) the head office of PAMCO-Japan in Japan acquired such shares in RTN-Philippines directly and without the participation of PAMCO-Rep Office; and 4) dividends arising from these shares inure to the sole benefit of PAMCO-Japan and PAMCO-Rep Office did not receive any of these dividends thus, PAMCO-Rep Office is not a material factor in the realization of dividends received by the PAMCO-Japan. In view thereof, considering that PAMCO holds 36% ownership in RTN-Philippines, and that PAMCO-Japan maintains this shareholding for more than six months immediately preceding the date of payment of the dividends, such dividends paid by RTN-Philippines to PAMCO-Japan are subject to the preferential tax rate of 10 percent based on the gross amount of dividends, pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-261-11 dated 10 November 2011, BIR Ruling No. ITAD-32-11 dated 28 January 2011) 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