ITAD Ruling No. 018-03

January 30, 2003 ITAD RULING NO. 018-03 Article 10, RP-Japan BIR Ruling No. DA-ITAD-80-02 KDK International (Phils . ) Corp . 11-A Harmony St., cor. Eleven Road Grace Village, Balintawak, Quezon City Attention: Mr. Ng Siong Chi Vice-President Gentlemen : This refers to your letter dated September 10, 2002, requesting confirmation of your opinion that your dividend payments to Matsushita Seiko Co. Ltd. (Matsushita) are subject to a preferential withholding tax rate of ten (10%) per cent, pursuant to Article 10 of the RP-Japan tax treaty. It is represented that Matsushita Seiko Co. Ltd. (Matsushita Seiko) is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Japan with principal address at 6-5-4 Chome, Kitahama, Chuo-Ku, Osaka, 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 March 4, 1999; that KDK International (Phils.) Corp. (KDK International) is a domestic corporation organized and existing under the laws of the Philippines with office address at 11-A Harmony St., cor. Eleven Road Grace Village, Balintawak, Quezon City; that as of June 30, 2002, Matsushita Seiko directly holds and owns seventy nine thousand nine hundred ninety-six (79,996) shares equivalent to Seven Million Nine Hundred Ninety-Nine Thousand Six Hundred Pesos (Php7,999,600.00) representing forty percent (40%) of the capital stock of KDK; that on June 10, 2002, the Board of Directors of KDK International declared cash dividends in the amount of Four Hundred Forty Thousand Pesos (Php440,000.00); and that said cash dividends were paid to the various stockholders including Matsushita Seiko Co. Ltd. as evidenced by the Secretary's Certificate dated August 22, 2002 and the Board Resolution dated July 9, 2002. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides, viz : "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 "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 aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10% if the latter holds directly at least 25% 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 . ITAD 80-02 dated May 2, 2002 ). Considering that Matsushita Seiko Co. Ltd. owns directly 40% of the total shares of KDK International (Phils.) Corp. for a period of six (6) months immediately preceding the date of payment of dividends, the dividend remittances of the KDK International (Phils.) Corp. to Matsushita Seiko are subject to a preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of 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