ITAD Ruling No. 035-02

March 27, 2002 ITAD RULING NO. 035-02 RP-Japan, Article 10 BIR Ruling No. ITAD 156-00 Shindengen Development Inc. C/o Shindengen Philippine Corporation Lot 20-22, SEPZ Carmelray Industrial Park Canlubang, Laguna Attention: Mr. Gregorio Finance Manager S i r : This refers to your letter dated May 28, 2001 on behalf of Shindengen Electric Manufacturing Company Ltd. (SEMCL), requesting confirmation of your opinion that the dividends to be paid and remitted to SEMCL by Shindengen Development Inc. (SDI) shall be subject to the preferential tax rate of ten percent (10%) pursuant to the RP-Japan tax treaty. It is represented that SEMCL is a corporation organized and existing under the laws of Japan with business address at New Ohtemachi Bldg., 2-1 Ohtemachi 2-chome, Chiyoda-ku, Tokyo, Japan; that SEMCL is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated December 2, 1999 issued by the Securities and Exchange Commission; that SDI is a corporation organized and existing under the laws of the Philippines and is registered with the Philippine Economic Zone Authority (PEZA) per Certificate of Registration No. 95-41 dated April 6, 1995; that as of December 31, 1999, SEMCL owns 40% of the issued and outstanding shares of stocks of SDI equivalent to 46,148 number of shares amounting to Four Million Six Hundred Fourteen Thousand Eight Hundred Pesos (P4,614,800); that there is no change as regards SEMCL's holdings in SDI as of June 30, 2000; that on April 6, 2000, SDI's Board of Directors declared a cash dividend of P3.27 per share of stock to be paid to stockholders of record as of December 31, 1999 on or before June 30, 2000 with a total amount of Three Hundred Seventy Seven Thousand (P377,358) part of which is payable to SEMCL amounting to One Hundred Fifty Thousand Nine Hundred Three Pesos and 96/100 (P150,903.96) as evidenced by the Minutes of the Special Meeting of the Board of Directors of SDI held at Prudential Bank Makati Office and the Corporate Secretary's Certificate. 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." Based on the above, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 percent if the latter holds directly at least 25 percent either of the voting shares or of the total shares of the former for a period of six months immediately preceding the date of payment of the dividends. Considering that SEMCL holds forty per cent (40%) of the capital stock of SDI during the period of six months immediately preceding the date of payment of dividends, the dividends to be paid and remitted by SDI to SEMCL are subject to the 10 percent preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan Tax Treaty. (BIR Ruling No. ITAD 156-00) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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 Enforcement Group