ITAD BIR Ruling No. 404-12

December 20, 2012 ITAD BIR RULING NO. 404-12 Article 10 (Dividends) Philippines-Japan tax treaty; BIR Ruling No. ITAD 174-11 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Philippines Attention: Luis Jose P. Ferrer Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 22 June 2012 requesting confirmation that dividends paid by Yakult Philippines, Inc. ("Yakult-Philippines") to Yakult Honsha Co., Ltd. ("Yakult-Japan") are subject to final withholding tax at the preferential rate of ten percent (10%) 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 Yakult-Japan is a non-resident foreign corporation organized and existing under the laws of Japan, with office address at 1-19 Higashi Shinbashi, 1-Chome, Minato-ku, Tokyo, Japan and is a company engaged in the manufacture and sale of dairy products, cosmetics, pharmaceuticals, juices, softdrinks and others based on the Certificate of Status of Taxable Person issued by the Taxation Office of Japan on 08 June 2012. The company Yakult-Japan is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 21 June 2012. Yakult-Philippines , on the other hand, is a domestic corporation with office address at Barrio Makiling, Calamba City, Laguna. The primary purpose of Yakult-Philippines is to engage in the manufacture, production and processing of Yakult beverages and drinks, utilizing the Yakult liquid manufacturing process, container molding and bottling process; to acquire raw materials, ingredients, machinery and equipment necessary for the manufacture and sale by wholesale of Yakult-manufactured products. The firm of Sycip Gorres Velayo & Co. is authorized by Yakult-Japan to act on behalf of the company in relation to the application of a ruling based on a Special Power of Attorney. It is further represented that Yakult-Philippines has an authorized capital stock of Six Hundred Million Pesos (Php600,000,000.00) divided into Six Hundred Million (600,000,000) common shares with a par value of One Peso (Php1.00) per share, all of which have been fully subscribed and paid-up. The company Yakult-Japan is the registered owner of the Two Hundred Forty Million (240,000,000) common shares, which represent 40% of the outstanding capital stock of Yakult-Philippines based on the Secretary's Certificate of Yakult-Philippines. TAHCEc On 14 December 2011, Yakult-Philippines declared cash dividends in the total amount of THREE HUNDRED MILLION PESOS (Php300,000,000.00) to be distributed among the stockholders of record as of 01 December 2011 based on the Minutes of Meeting of the Board of Directors of Yakult-Philippines. Further, on 29 June 2012, Yakult-Philippines remitted the amount of Two Million Five Hundred Forty Four Thousand One Hundred Sixty Nine Pesos and Sixty One Centavos (US$2,544,169.61) or One Hundred Eight Million Pesos (Php108,000,000.00) at the exchange rate of US$1=P42.45 on 29 June 2012 based on a duly notarized Certification issued by Rizal Commercial Banking Corporation. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the Sworn Statement of Yakult-Philippines President Alberto R. Dy Sun. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, dividends paid to Yakult-Japan are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, 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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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: aESTAI 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. For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: " 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 xxx xxx xxx 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 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. Considering that during the period of six (6) months immediately preceding the date of payment of cash dividend, Yakult-Japan owns 40% shares in Yakult-Philippines , which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, the dividends paid by Yakult-Philippines to Yakult-Japan are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR ITAD Ruling No. 174-11) TaCSAD 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