ITAD Ruling No. 023-04

March 9, 2004 ITAD RULING NO. 023-04 Article 10, RP-Japan Article 10, RP-Singapore BIR Ruling No. DA-ITAD No. 184-03 BIR Ruling No. DA-ITAD No. 53-03 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Ms. Marivic C. Espano Tax Partner Gentlemen : This refers to your application for relief from double taxation dated November 27, 2003 requesting confirmation of your opinion that the dividend payments of your client, JFE Techno Manila, Inc. (JFE Phil.) to: (1) JFE Engineering Corporation (JFE Corp.);(2) JFE Soldec Corporation (JFE Soldec);(3) JFE Plant and Service Corporation (JFE P&S);and (4) JFE Engineering Pte.,Ltd. (JFE Ltd.),hereinafter referred to as "Stockholders," are subject to the preferential tax rates of 10% and 25%, respectively, pursuant to Article 10 of the RP-Japan and RP-Singapore tax treaties. It is represented that JFE Corp.,JFE Soldec and JFE P&S are non-resident foreign corporations duly organized and existing under and by virtue of the laws of Japan while JFE Ltd. is a non-resident foreign corporation duly organized and existing under the laws of Singapore; that the JFE Soldec, JFE P&S and JFE Ltd. are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission (SEC),all dated November 28, 2003; that JFE Corp. is registered as a corporation licensed to do business in the Philippines through JFE Engineering Corp.-Philippine Branch (JFE-Manila),as verified by the Securities and Exchange Commission (SEC) dated November 28, 2003; that JFE Phil, on the other hand, is a domestic corporation organized and existing under Philippine laws with principal office at 23rd Floor, Wynsum Corporate Plaza, 22 Emerald Ave.,Ortigas Center, Pasig City; that the Stockholders have been the stockholders of record of JFE Phil for a period of at least six months or more prior to the declaration of cash dividends on June 30, 2003 with the following ownership, to wit: Shareholder Number of Par Value Paid-up Percent of Shares Ownership JFE Engineering Corp. 145,000 P14,500,000 P14,500,000 50.00% JFE Soldec Corp. 86,999 P8,699,900 P8,699,900 29.99% JFE Plant & Service Corp 55,100 P5,510,000 P5,510,000 19.00% JFE Engineering Pte. Ltd 2,886 P288,600 P288,600 .99% that on June 30, 2003, the Board of Directors of JFE Phil declared cash dividends for the period covering the fiscal year ending December 31, 2002 in the amount of Php29,000,000.00 to its stockholders of record, payable not later than December 31, 2003; and that the said dividends were actually paid on December 9, 2003. 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" "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. "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, and 25% tax rate in all other cases. However, the said preferential rates shall not apply if the beneficial owner of the dividends carries on business in the Philippines through a permanent establishment and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. ( BIR Ruling No. DA-ITAD 184-03 dated November 27, 2003 ) In the instant case, while the JFE Corp. maintains a Philippine branch, it is represented that said branch is not privy and does not have any participation whatsoever in the holding of JFE Corp.'s shares of stocks in JFE Phil so that any income derived by JFE Corp. independently of its Philippine Branch shall be considered income of JFE Corp. alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989),pertinently quoted hereunder: "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 that 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 of the branch. Consequently, the taxpayer is 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." (emphasis ours) Such being the case, considering that JFE Corp. and JFE Soldec hold directly 50% and 29.99%, respectively, of the shares of stock of JFE Phil during the period of six months immediately preceding the date of payment of the dividends, and that the holding of the subject shares are not effectively connected with JFE-Manila as the latter is not privy to the transactions between JFE Corp. and JFE Phil, this Office is of the opinion and so holds that the dividends received by JFE Corp. and JFE Soldec are subject to the preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the RP-Japan tax treaty. On the other hand, since JFE P&S holds only 19% of the shares of stock of JFE Phil, the dividends received by JFE P&S are subject to the preferential tax rate of 25% of the gross amount of dividends pursuant to Article 10(2)(b) of the said treaty. As regards the taxability of the dividend income received by JFE Ltd., please be informed that Article 10 of the RP-Singapore tax treaty provides as follows: "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 State. "2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: "a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any),at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and "b) in all other cases, 25 per cent of the gross amounts of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. "4. The term "dividends" as used in this Article means income from shares, jouissance shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. "xxx xxx xxx" Based on the foregoing provisions, the 15 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividend owns at least 15 percent of the outstanding voting shares of the paying company and such shareholdings should have existed during the part of the taxable year immediately preceding the day of payment and during the whole of its prior taxable year, and 25% tax rate in all other cases. Since JFE Ltd. holds only 0.99% of the shares of stock of JFE Phil., the dividends received by JFE Ltd. shall be subject to the preferential tax rate of 25% pursuant to Article 10(2)(b) of the RP-Singapore tax treaty. ( BIR Ruling No. DA-ITAD 53-03 dated April 9, 2003 ) In fine, the dividend income received by JFE Corp. and JFE Soldec are subject to the preferential tax rate of 10% while dividends received by JFE P&S and JFE Ltd. are subject to 25% pursuant to the pertinent provisions of the RP-Japan and RP-Singapore tax treaties. It is understood that the obligations to deduct and withhold the tax arises at the time that the cash dividend is paid or payable, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Accordingly, the obligations to deduct and withhold the tax arise at the time the cash dividends become payable in accordance with the terms of the resolution of the Board of Directors. Also, the due date is within 10 days from the end of month that it becomes paid or payable. 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. EcSCAD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service