ITAD BIR Ruling No. 402-12

December 20, 2012 ITAD BIR RULING NO. 402-12 Article 10, Philippines-Japan Tax Treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 28, 2012, on behalf of Sojitz Corporation ("Sojitz") , requesting confirmation that the dividend payments of Rio Tuba Nickel Mining Corporation ("Rio Tuba") to Sojitz are subject to the 15 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 Sojitz , with address at 1-20 Akasaka 6-chome. Minato-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan and is a resident of Japan per Residence Certificate issued by the District Director of Azabu Tax Office on June 15, 2012; that Sojitz was issued a license to do business in the Philippines (" Sojitz Phils.-Branch ") on April 6, 1967; that to date, no petition for the withdrawal or cancellation has been filed as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on July 6, 2012; and that Rio Tuba , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 2F, NAC Centre, Dela Rosa corner Adelantado Street, Legaspi Village, Makati City. It is also represented, per Secretary's Certificate dated June 26, 2012, that Sojitz beneficially owns 60,000,000 common shares with a total par value of Php60,000,000.00, representing 4% of the total outstanding capital stock of Rio Tuba ; and that these shares were acquired by Sojitz on various dates starting year 1975 to year 2009 through purchase. It is further represented that at its meeting on June 4, 2012, the Board of Directors of Rio Tuba approved the declaration of cash dividend of One Billion Five Hundred Million Pesos (PhP1,500,000,000.00) out of the unrestricted retained earnings of Rio Tuba as of December 31, 2011 to stockholders of record as of June 1, 2012; that the said dividend was remitted to Sojitz on June 29, 2012 as evidenced by a Sworn Certification from Security Bank dated July 26, 2012. HcSCED It is further represented that Sojitz Phils.-Branch has no participation whatsoever, directly or indirectly, in the investments of Sojitz in Rio Tuba and it has no connection with the dividends received by Sojitz from Rio Tuba and that such do not form part of the assets of Sojitz Phils.-Branch , as evidenced by a sworn certification of Sojitz Phils.-Branch on June 28, 2012. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by Rio Tuba dated June 25, 2012. 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. EaISTD xxx xxx xxx" Thus, 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; (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. 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. 6. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other Contracting State." HIAEaC 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 (6) months immediately preceding the date of payment of the dividends; and in all other cases, 15 percent rate shall apply. However, under paragraph 5, Article 10 of the Philippines-Japan tax treaty, as amended, the reduced rates on dividends under paragraphs 2 and 3 of Article 10 will not apply to such dividends paid to Sojitz if they are effectively connected to a permanent establishment which Sojitz has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, Sojitz Phils.-Branch , being an office of Sojitz in the Philippines, is considered a permanent establishment of Sojitz in the Philippines, thus: "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. 2. 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 dividends being effectively connected with a permanent establishment, the relevant commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 17, 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)." (Emphasis added) (Pages 156-157) CIScaA Similarly, based on the Supreme Court ruling in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), dividends paid to the head office of a foreign corporation which has a branch office in the Philippines are effectively connected to the branch office if the business transactions that give rise to the dividends are conducted through the branch 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 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." Applying the OECD commentaries and the Supreme Court ruling, such dividends paid by Rio Tuba to Sojitz cannot be considered as effectively connected with the Sojitz Phils.-Branch since, as represented, Sojitz Phils.-Branch has no investments nor shares of stock in Rio Tuba; Sojitz Phils.-Branch neither uses nor holds for use in the conduct of its trade or business any shares of stock in Rio Tuba . Consequently, all gains (dividends) that arise from these shares inure to the sole benefit of the head office and are not received by Sojitz Phils.-Branch , and hence, Sojitz Phils.-Branch is not a material factor in the realization of such gains (dividends) received by the head office. Considering that Sojitz holds 60,000,000 common shares, which represent 4% of Rio Tuba 's total shares which is less than 10 percent shareholding requirement of the total shares issued by that company, Office is of the opinion and so holds that the dividends paid by Rio Tuba to Sojitz are subject to 15 percent of the gross amount of dividends , pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. 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