ITAD Ruling No. 005-03

January 16, 2003 ITAD RULING NO. 005-03 Article 10, RP-Japan BIR Ruling No. DA-ITAD-95-02 Luis Caete, & Company 3F Oftana Bldg., Jasmin cor. Don Mariano Cui Sts. Cebu City Attention: Luis A . Caete Authorized Representative Gentlemen : This refers to your letter dated August 15, 2002, applying for a preferential tax treaty rate of ten percent (10%) pursuant to paragraph (2)(a), Article 10 of the RP-Japan tax treaty on the dividend payments of Tsuneishi Heavy Industries (Cebu) Inc. (THICI) to Tsuneishi Research and Development Corp. (TRDC). IEAaST It is represented that TRDC is a non-resident foreign corporation with business address at 1083 Tsuneishi Numakuma Cho Numakuma-Gun, Hiroshima Prefecture, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 22, 2002; that THICI is a domestic corporation with principal office at West Cebu Industrial Park-Special Economic Zone, Balamban, Cebu; that as of October 15, 2001, TRDC, a registered shareholder of THICI, holds eighty million nine hundred ninety nine thousand nine hundred ninety nine (80,999,999) common shares with a total par value of P80,999,999.00 consisting of 26.9999997% of 300,000,000 common stock of THICI; that on March 8, 2002, THICI declared cash dividends in the total amount of Fifteen Million Pesos (P15,000,000.00) from its unrestricted Retained Earnings, to be issued pro-rata to all stockholders of record as of the close of business hours on December 31, 2001, payable on April 15, 2002. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides as follows: "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 25 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) 25 per cent of the gross amount of the dividends in all other cases. "xxx xxx xxx "3. . . . "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 abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 per cent if the latter holds directly at least 25 percent either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. ( BIR Ruling No. DA-ITAD 95-02 dated May 16, 2002 ) CAIaDT Such being the case, and since TRDC holds twenty nine and 99/100 (29.99%) per cent of the capital stock of THICI during the period of six months immediately preceding the date of payment of the dividends, the dividends to be paid and remitted by THICI to TRDC are subject to the ten per cent (10%) preferential tax rate pursuant to Article 10(2)(a) or the RP-Japan tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service