ITAD Ruling No. 024-02

March 6, 2002 ITAD RULING NO. 024-02 Article 10 (2) (a), RP-Japan BIR Ruling No. ITAD-75-00 & BIR Ruling No. ITAD 193-00 Sycip Gorres & Velayo 6760 Ayala Avenue, 1226 Makati City Attention: E. C. ALCANTARA Tax Division Gentlemen : This refers to your letter dated June 27, 2001, on behalf of your clients, Marubeni Mindanao Power Holdings Corp. et. al., requesting to avail of the preferential tax rate of ten percent (10%) final withholding tax on their dividend payments to Marubeni Corp. (Japan) pursuant to Article 10(2)(a) of the RP-Japan tax treaty. It is represented that Marubeni Japan is a foreign corporation organized and existing under the laws of Japan with principal office address at 5-7 Hommachi 2-Chome, Chiroku, Osaka, Japan; that it is licensed to engage in business under Philippine laws as per Certificate of Registration issued by the Securities and Exchange Commission (SEC) dated March 20, 1997; that Marubeni Mindanao Power Holdings Corp. (MMPHC), Marubeni Mindanao II Power Holdings Corp. (MM2PHC) and Marubeni Pacific II Energy Holdings Corp. (MP2EHC) are domestic corporations duly organized and existing under Philippine laws with principal office address at 7th Floor, L.V. Locsin Bldg., Ayala cor. Makati Aves., Makati City; that on September 8, 2000, Marubeni Japan, as the Assignor, executed two (2) distinct and separate Deeds of Assignment with MM2PHC and MP2EHC, as the Assignees, whereby the Assignor extended advances or deposits for future subscription to the Assignees in the aggregate amount of Php 711,688,500.00 and Php 874,008,500.00, respectively; that the Assignor agreed to convert the said advances into additional equity in Assignees which will be composed of 71,168 and 87,400 redeemable preferred shares; that although Marubeni Japan has a branch in the Phils., these equity investments were directly made by it and the dividends on these investments were likewise directly remitted to and received by Marubeni Japan; that such dividends are not income of the Philippine branch and not taxable to said branch; that as per Secretary's Certificate of MMPHC, MM2PHC and MP2EHC dated April 19, 2001, Marubeni Japan is the registered owner of the 99.99% of all the outstanding capital stocks of each of these corporations; that on March 6, 2001, the Board of Directors of these corporations declared cash dividends in the total amount of Three Million Five Hundred Thousand US Dollars (US$3,500,000.00) to all stockholders of record on the basis of their outstanding stockholdings; that the said dividends shall be payable within sixty (60) days from the date of their declaration; that the percentage shareholding of Marubeni Japan in MMPHC, MM2PHC and MP2EHC during the period of six (6) months immediately preceding the date of payment of the dividends is over and above 25% of the total shares issued by these companies. 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." The 10% preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 25% of either the outstanding voting shares of the paying corporation or of the total shares issued by that company and has been holding the said shares for a period at least six (6) months immediately preceding the date of payment of the dividends. In view of the foregoing, and since Marubeni Japan holds 99.99% of the total subscribed shares of MMPHC, MM2PHC and MP2EHC, the dividend remittances to Marubeni Japan are subject to the preferential tax treaty rate of ten percent (10%). This is notwithstanding the fact that Marubeni Japan has branches in the Philippines since the equity investments were made independently by Marubeni Japan and not through the Philippine branches. Such being the case, the dividend income cannot be attributed as an ordinary consequence of Marubeni Japan's trade or business in the Philippines. ( Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Appeals , G.R. No. 76573, September 14, 1989, 177 SCRA. 500; BIR Ruling No. ITAD-75-00 dated June 16, 2000 and BIR Ruling No. ITAD-193-00 dated December 7, 2000) This ruling is 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group