ITAD Ruling No. 034-05

April 18, 2005 ITAD RULING NO. 034-05 Art. 10, Philippines-Japan Tax Treaty BIR Ruling No. DA-ITAD 164-02 SHI Designing & Manufacturing, Inc . 32nd Floor Raffles Corporate Center Emerald Avenue, Ortigas Center Pasig City Attention: Masao Yokoo President & CEO Gentlemen : This refers to your letter dated October 12, 2004, applying for tax treaty relief, on behalf of Sumitomo Heavy Industries, Ltd. (SHI-Japan), for the dividend income earned as the major stockholder of SHI Designing & Manufacturing, Inc. (SDMI-Phils.) pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that SHI-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal at 9-11, Kitashinagawa, 5-Chome, Shinagawa-ku, Tokyo 141, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated November 10, 2004; that SDMI-Phils. is a corporation organized and existing under the laws of the Philippines with principal address at 32nd Floor Raffles Corporate Center, Emerald Avenue, Ortigas Center, Pasig City; that it is 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, 2004, SHI-Japan owns One Hundred Twenty Seven Thousand Four Hundred Eighty Five (127,485) shares of stock with par value of One Hundred Pesos (P100) per share or a total of Twelve Million Seven Hundred Forty Eight Thousand Five Hundred Pesos (P12,748,500.00) which constitutes 99.988% of the total ownership in SDMI-Phils., and that on July 8, 2004, the Board of Directors of SDMI-Phils., resolved that cash dividends equivalent to 10% of the total outstanding capital stock, or a dividend of P10.00 per share, from out of the accumulated retained earnings of the corporation be declared in favor of all stockholders of record as of July 8, 2004. 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. "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 pert 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. EcASIC 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 percent 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, or if the dividends are paid to by a company who is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment. In view thereof and considering that SDMI-Phils. is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment, said dividends to be paid by SDMI-Phils. to SHI-Japan are subject to 10 percent preferential tax rate, pursuant to the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 164-02 dated September 23, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group