ITAD Ruling No. 048-03

March 24, 2003 ITAD RULING NO. 048-03 RP-Japan Tax Treaty Art. 10 DA-ITAD-158-02 Crestec Philippines, Inc. Unit 106 & 107 Charlie Bldg. 789 Subic International Hotel Complex Sta. Rita SBFZ 2200, Zambales Attention: Mr. Saburo Yamashita Managing Director Gentlemen : This refers to your application for relief from double taxation dated July 19, 2002, pursuant to the RP-Japan tax treaty regarding the cash dividends to be remitted by Crestec Philippines, Inc. (Crestec Phils) to Crestec Incorporation (Crestec Japan). It is represented that Crestec Japan is a corporation duly organized and existing under the laws of Japan with business address at 676 Kasai Shinden-cho, Hamamatsu City, Shizuoka, Prefecture, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated July 23, 2002; that Crestec Phils is a corporation duly organized and existing under the laws of the Philippines with business address at Units 106 & 107 Charlie Building, 789 Subic International Hotel Complex, Santa Rita SBFZ 2200, Zambales; that Crestec Japan owns 83,995 shares, approximately 99.99% ownership of Crestec Phils, with a total value of P8,399,500.00 per Crestec Phils Secretary's Certificate dated July 19, 2002 and Certificate of Shares of Stocks No. 001 dated July 11, 2000; and that on June 25, 2002, the Board resolved to declare dividends amounting to P4,147,000.00 based on the retained earnings of the audited financial statements ending December 31, 2001, payable to shareholders of record as of May 31, 2002. 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. "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. AECacT "3. . . . "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 abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 per cent if the latter holds directly at least 25 per cent either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. ( BIR Ruling No. DA-ITAD 158-02 dated September 23, 2002 ) Such being the case, and since Crestec Japan holds directly 99.99% of the voting shares of Crestec Phils for a period of six months immediately preceding the date of payment of the dividends, this Office is of the opinion and so holds that the cash dividends to be remitted by Crestec Phils to Crestec Japan are subject to the 10% preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan tax treaty. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service