ITAD Ruling No. 047-03

March 21, 2003 ITAD RULING NO. 047-03 Article 10 and 11 Philippines-Japan Tax Treaty BIR Ruling No. ITAD-107-00 BIR Ruling No. ITAD-48-02 Diaz Murillo Dalupan (L.C. Diaz & Co.) Certified Public Accountants 5th Floor, Don Jacinto Building Dela Rosa Street corner Salcedo Streets Legaspi Village, Makati City Attention: Atty. Millard M. Manseguiao Director, Tax and Corporate Service Gentlemen : This refers to the letters dated October 1 and 25 and November 19, 2001 of Precision Springs Manila , Incorporated (Precision-Manila) and Precision Springs Cebu, Incorporated (Precision-Cebu) requesting for preferential tax rates pursuant to the Philippines-Japan tax treaty on: (1) the dividends declared by them in favor of Mitsubishi Steel Manufacturing Company, Ltd. ( Mitsubishi ), and (2) the interest paid by Precision-Cebu to Mitsubishi in respect of a loan agreement. It is represented that Mitsubishi is a corporation organized and existing under the laws of Japan with principal office at 2-22, 3-chome, Harumi, Chuo-Ku, Tokyo, Japan, and that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated March 30, 2001 issued by the Securities and Exchange Commission ; that Precision-Manila and Precision-Cebu are corporations organized and existing under the laws of the Philippines which principal offices are respectively located at Light Industrial Science Park II, Barrio Real, Calamba, Laguna and at 5th Street, Philippine Economic Zone Authority-Mactan, Pusok, Lapu-Lapu City, Mactan Island, Cebu, and that they are registered Philippine Economic Zone Authority enterprises; and that Precision-Manila declared dividends on February 8 and September 3, 2001 respectively amounting to P37,825,059.00 and P55,679,000.00, and Precision-Cebu declared dividends on February 23 and September 4, 2001 respectively amounting to P23,640,662.00 and P30,000,000.00, both in favor of Mitsubishi. It is further represented that on March 5, 2001, a loan agreement was entered into by and between Precision-Cebu and Mitsubishi whereby Mitsubishi agreed to extend to Precision-Cebu a loan of 60,000,000 with maturity of one year; that the loan was subsequently credited to Precision-Cebu' s account at Prudential Bank-Cebu Mactan Export Processing Zone Branch on the same date; that Precision-Cebu shall periodically pay interest on the loan on the last business day of March, June, September and December 2001; and that the interest rate applicable thereon shall be the long term prime rate of interest announced from time to time by The Japan Industrial Bank Head Office (or its successor) plus 0.50%. In reply, as regards the applicable tax on dividends, please be informed that the pertinent provisions of Article 10 of the Philippines-Japan tax treaty provide: "1. Dividends arising in a Contracting State and paid 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 aforequoted provisions, the Philippines may tax dividends paid by a Philippine corporation to a Japanese corporation which is the beneficial owner of such dividends at a rate not exceeding (a) 10 percent if the Japanese corporation holds directly at least 25 percent either of the voting shares or of the total shares of the Philippine corporation for a period of six months immediately preceding the date of payment of the dividends, or (b) 25 percent in all other cases. Thus, in order for the subject dividends declared by Precision-Manila and Precision-Cebu in favor of Mitsubishi to be entitled to the preferential tax treaty rates of 10 percent and 25 percent, Mitsubishi must be the beneficial owner of such dividends as of the relevant dates of their declaration. Specifically, the 10 percent tax rate shall apply if Mitsubishi , aside from being the beneficial owner of such dividends, held directly a minimum stockholding of 25 percent for six months in Precision-Manila , i.e. , during the periods August 8, 2000 to February 8, 2001 and March 3 to September 3, 2001, and in Precision-Cebu , during the periods August 23, 2000 to February 23, 2001 and March 4 to September 4, 2001. Relative thereto, the submitted documents disclose Precision-Manila' s and Precision-Cebu' s major stockholdings as of the following dates: SHIETa Precision-Manila Stockholder Date Number Par Amount of Shares Percentage of Shares Value Subscribed Subscribed Precision Springs August 8, 57,999,995 P1.00 P57,999,995.00 99.90% Company, Ltd. 2000 Precision Springs February 8, 57,999,995 P1.00 P57,999,995.00 99.90% Company, Ltd. 2001 Precision Springs March 3, 57,999,995 P1.00 P57,999,995.00 99.90% Company, Ltd. 2001 Precision Springs September 3, 57,999,995 P1.00 P57,999,995.00 99.90% Company, Ltd. 2001 Precision-Cebu Stockholder Date Number Par Amount of Shares Percentage of Shares Value Subscribed Subscribed Precision Springs August 23, 23,999,995 P1.00 P23,999,995.00 99.90% Company, Ltd. 2000 Mitsubishi February 23, 23,999,995 P1.00 P23,999,995.00 99.90% 2001 Mitsubishi March 4, 23,999,995 P1.00 P23,999,995.00 99.90% 2001 Mitsubishi September 4, 23,999,995 P1.00 P23,999,995.00 99.90% 2001 As shown above, Precision-Cebu' s stockholdings as of February 23, March 4 and September 4, 2001, bearing the name "Mitsubishi" in the List of Stockholders presented by the Assistant Corporate Secretary of Precision-Cebu is not accurate since the Certificate Authorizing Registration of Precision-Cebu' s shares of stock from Precision Springs Company, Ltd. ( Precision-Japan ) to Mitsubishi (CAR 2000-00151251) was issued by the Bureau of Internal Revenue District Office No. 80 ( Mandaue City ) only on November 12, 2001. Hence, as of November 12, 2001, the stockholder of record of Precision-Cebu remained to be Precision-Japa n and not Mitsubishi . Relative to the above entries, you are of the opinion that such dividends declared in favor of Mitsubishi are entitled to the 10 percent tax rate since Mitsubishi had complied with the required six-month holding period in Precision-Manila and Precision-Cebu , citing as reckoning point the date of the relevant sale on August 31, 2000 of the shares of stock of the domestic companies from Precision-Japan to Mitsubishi . Also, it is your view that as of the date of sale on August 31, 2000, Mitsubishi has become the beneficial owner of the subject shares of stock, even if its name was not yet reflected in the stock and transfer books of Precision-Manila and Precision-Cebu as of the relevant dates of declaration. In reply, this Office is of the opinion that Mitsubishi became the beneficial owner of the subject shares in Precision-Manila and Precision-Cebu as of the relevant date of sale on August 31, 2000 so that dividends declared in favor of such shares beginning at that date and thereafter constitute dividends beneficially owned by Mitsubishi . It is clear that Mitsubishi , as of August 31, 2000, had already acquired the right to enjoy the benefits ( i.e. , right to dividends, to vote, to appreciation in value, and to transfer rights of ownership) of the shares in the domestic companies, and had already accepted any risk of loss that might arise with respect to such shares, regardless of the date on which the name "Mitsubishi" was consequently reflected in the stock and transfer books of the domestic companies. In view of the foregoing, dividends declared by Precision-Manila and Precision-Cebu on February 8 and 23 and September 3 and 4, 2001 in favor of Mitsubishi shall be subject to 25 percent of the gross amount of such dividends pursuant to Article 10(2)(b) of the Philippines-Japan tax treaty ( BIR Ruling No. ITAD-107-00 dated August 9, 2000 ). On the other hand, dividends declared by the domestic companies in favor of Mitsubishi after the latter has been reflected in the stock and transfer books of the domestic companies, as direct holder of at least 25 percent 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, are entitled to the more preferential rate of 10 percent under Article 10(2)(a) of the Philippines-Japan tax treaty. On the other hand, as regards the applicable tax on interest, please be informed that the pertinent provisions of Article 11 of the Philippines-Japan tax treaty provide: "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases." Based on the aforequoted provisions, the Philippines may tax the interest paid by a domestic company to a Japanese company at a rate not exceeding 15 percent if the latter is the recipient and the beneficial owner of the interest. Considering that Mitsubishi is the recipient and the beneficial owner of the interest paid by Precision-Cebu in respect of the loan of 60,000,000 extended by Mitsubishi to Precision-Cebu , such interest is therefore subject to a preferential tax rate of 15 percent. ( BIR Ruling No. ITAD 48-02 dated April 15, 2002 ) TIaCHA Moreover, the loan agreement entered into by and between Mitsubishi and Precision-Cebu on March 5, 2001 is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997 . 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service