ITAD Ruling No. 007-01

February 12, 2001 ITAD RULING NO. 007-01 Art. 10 RP-Japan ITAD 49-00 Mitsuba Philippines Realty Corporation Lot 1, Block 14, Phase II, First Cavite Industrial Estate Brgy. Langkaan, Dasmarias, Cavite 4114 Attention: Mr . Takashi Nara Director Gentlemen : This refers to your letter dated February 24, 2000 requesting confirmation of your opinion that dividends to be paid by Mitsuba Philippines Realty Corporation ( Mitsuba Philippines ) to Mitsuba Corporation ( Mitsuba Japan ) are subject to the 10 percent tax rate pursuant to Article 10 of the Philippines-Japan Tax Treaty. It is represented that Mitsuba Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 1-2681 Hirosawa, Cho Kiryu City, Gunma, Japan; that it is not registered as a corporation or partnership in the Philippines as per Securities and Exchange Commission certificate dated March 22, 2000; that Mitsuba Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address at Lot 1, Block 14, Phase II, First Cavite Industrial Estate, Brgy. Langkaan, Dasmarias, Cavite; that as of December 31, 1997 and as of December 31, 1999, Mitsuba Japan holds 39.86 percent of the capital stock of Mitsuba Philippines ; that on July 24, 1998, the Board of Directors of Mitsuba Philippines passed and approved the declaration of cash dividends amounting to Two Hundred Sixty-three Thousand and Seventy-eight Pesos (P263,078.00) to be sourced from Mitsuba Philippines ' retained earnings and to be paid on or before August 31, 1998 to stockholders of record as of August 1, 1998; that, also, on March 3, 1999, Mitsuba Philippines declared dividends amounting to Two Hundred Twelve Thousand Four hundred and Fifteen Pesos (P212,415.00) to be paid on or before May 31, 1999 to stockholders as of May 1, 1999. In reply, please be informed that Article 10 of the Philippines-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. DEHcTI "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. 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. . . . "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 above, 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 25 percent either of the voting shares 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 view of the foregoing, since Mitsuba Japan holds directly 39.86 percent of the capital stock of Mitsuba Philippines for a period of six months before the latter declared dividends, your opinion that dividends to be paid by Mitsuba Philippines to Mitsuba Japan are subject to the 10 percent preferential tax rate under the Philippines-Japan Tax Treaty is hereby confirmed. The preferential tax rate shall likewise apply to future payments of dividends by Mitsuba Philippines to Mitsuba Japan provided the latter maintains the required 25 percent minimum shareholdings in the former for a period of six months before the declaration of the dividends. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be rendered null and void. TDcHCa Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group