ITAD Ruling No. 048-02

April 15, 2002 ITAD RULING NO. 048-02 RP-Japan, Article 10 & 11 NIRC,Sec. 180 BIR Ruling No. DA-ITAD-63-01 BIR Ruling No. DA-ITAD-94-01 Toei Animation Philippines, Inc. 128 West Avenue 1108 Quezon City Attention: Nestor P. Palabrica General Manager Gentlemen : This refers to your letter dated November 5, 2001 requesting confirmation of your opinion that the dividend and interest payments made by your company to Toei Animation Co., Ltd. (Toei Japan) are subject to the preferential withholding tax rate of 10 percent (10%) and 15 percent (15%), respectively, pursuant to the RP-Japan tax treaty. It is represented that Toei Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at 2-10-5 Higashioizumi Nerima-Ku, Tokyo, 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 December 8, 2000; that Toei Animation Philippines, Inc. (Toei Philippines) is a corporation duly organized and existing under Philippine laws; that on March 8, 2000, the Board of Directors of Toei Philippines declared cash dividends in the amount of Php3,350,000.00 and stock dividends worth Php8,344,172.00 in favor of stockholders of record as of December 31, 2000; that the actual payment of the cash dividends is on June 5, 2000; and that Toei Japan owns 10 Million shares with a total par value of Php10 Million representing 90% of the outstanding capital stock of Toei Philippines as of December 31, 1999. Moreover, it is also represented that on September 27, 2001, a Loan Agreement was entered into by and between Toei Japan and Toei Philippines; and that under the Loan Agreement, Toei Japan agreed to lend Toei Philippines the amount of One Hundred Million Yen (Y100,000,000.00) payable within a period of eight (8) years at an interest rate of three percent (3%) per annum. 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; (emphasis supplied) xxx xxx xxx 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" Therefore, since Toei Japan owns 90% of the total capital stock of Toei Philippines for six months immediately preceding the date of payment of the dividends, this Office confirms your opinion as it hereby holds that the dividend payments by your company to Toei Japan are subject to the preferential tax rate of 10 percent pursuant to Article 10(2)(a) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-63-01 dated July 31, 2001. ) As regards the interest payments, Article 11 of the same treaty provides, viz : "Article 11 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. (emphasis supplied) xxx xxx xxx 5. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx xxx xxx" Since the interest payments by Toei Philippines to Toei Japan are not in respect of Government securities, or bonds or debentures, the said interest payments are subject to the preferential withholding tax rate of 15% of the gross amount of interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-94-01 dated October 19, 2001 ) TAIaHE Finally, the Loan Agreement entered into by and between Toei Japan and Toei Philippines dated September 27, 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 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service