ITAD Ruling No. 031-04

April 2, 2004 ITAD RULING NO. 031-04 Article 10, RP-Japan BIR Ruling No. DA-ITAD-164-02 SHI Designing & Manufacturing, Inc. (SDMI) 32nd Floor Raffles Corporate Center Emerald Avenue, Ortigas Center Pasig City, Philippines 1605 Attention: Mr. Masao Yokoo President & CEO Gentlemen : This refers to your letter dated September 16, 2003 applying for tax treaty relief on the cash dividends declared by SDMI in favor of SUMITOMO HEAVY INDUSTRIES, LTD. (SHI), pursuant to the RP-Japan tax treaty. It is represented that SHI is a corporation organized and existing under the laws of Japan with office address at 9-11, Kitashinagawa, 5-Chome, Shinagawa-ku, Tokyo 141, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to engage in business in the Philippines per certification issued by the Securities and Exchange Commission dated July 12, 2000; that SDMI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines, registered with the Board of Investments (BOI) on a preferred pioneer status per BOI Certificate of Registration dated February 2, 1990; that as of May 31, 2003, SHI holds One Hundred Twenty Seven Thousand Four Hundred Eighty Five (127,485) shares with a par value of One hundred Pesos (P100.00) per share or a total of Twelve Million Seven Hundred Forty Eight Thousand Five Hundred Pesos (P12,748,500.00) which constitute 99.988% of the total outstanding and voting shares of SDMI; that on June 6, 2003, the Board of Directors of SDMI resolved and confirmed the declaration of cash dividends equivalent to 10% of the total outstanding capital stock out of the accumulated retained earnings of SDMI, to all its stockholders of record, as of June 6, 2003 to be paid immediately. 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; (Emphasis supplied) "(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) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. "(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 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 per cent 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, and/or if the Philippine company is a BOI-registered enterprise engaged in preferred pioneer areas of investment. In view thereof, considering that Sumitomo Heavy Industries, Ltd. directly holds 99.998 % of the outstanding and voting shares of SHI Designing and Manufacturing, Inc. for a period of six months before the latter declared dividends, and considering further that the latter company is BOI-registered and engaged in preferred pioneer areas of investment, the dividends to be paid by SHI Designing and Manufacturing, Inc. to Sumitomo Heavy Industries, Ltd. are subject to 10 percent preferential tax rate, pursuant to the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-164-02 dated August 06, 2002 ) 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. THcaDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service