ITAD Ruling No. 050-04

May 7, 2004 ITAD RULING NO. 050-04 Article 10 Philippines-Japan tax treaty BIR Ruling No. ITAD 23-04 Autrans Philippines Corporation c/o Mitsubishi Motors Philippines Corp. Plant-3 Ortigas Avenue Extension, Cainta, Rizal Attention: Ms. Rosita V. Favis Finance & Admin. Manager Gentlemen : This refers to your application for relief from double taxation dated November 04, 2003, requesting for a refund in the amount of Four Hundred Thousand Pesos (P400,000.00), representing the over-remitted tax on dividends for the month of November 2002, pursuant to the Philippines-Japan tax treaty. It is represented that Nissho Iwai Corporation (NIC) is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Japan with office address at 3-1, Daiba 2-Chome, Minato-ku Tokyo 135-8655, Japan; that NIC is registered as a corporation licensed to do business in the Philippines through Nissho Iwai Corporation Philippine Branch (NIC-Manila),as verified by the Securities and Exchange Commission (SFC) dated April 4, 1967; that Autrans Philippines Corporation (APC) is a domestic corporation organized and existing under Philippine laws with principal office at c/o Mitsubishi Motors Philippines Corporation Plant-3, Ortigas Avenue, Extension Cainta, Rizal; that NIC owns 80% of the stockholding of APC and held by NIC since incorporation and that no transactions of sales, purchases, and transfers have been recorded except for the one share each held by the Directors; that on October 23, 2002, the Board of Directors declared cash dividends in the amount of Ten Million Pesos (P10,000,000.00) out of the total income which the corporation earned; and that the said dividends were remitted to NIC on November 7, 2002 and February 14, 2003. In reply, please be informed that Article 10 of the Philippine-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 "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. "5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. "xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10% of the gross amount of dividends if the latter holds directly at least 25% 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, or tax at the rate of 25% of the gross amount of dividends, in all other cases. However, the 10% and 25% preferential rates shall not apply if the beneficial owner of the dividends carries on business in the Philippines through a permanent establishment and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. ( BIR Ruling No. DA-ITAD No. 23-04 dated March 9, 2004 ) In the instant case, while NIC maintains a Philippine branch, it is represented that said branch is not privy and does not have any participation whatsoever in the holding of NIC's shares of stocks in APC so that any income derived by NIC independently of its Philippine Branch shall be considered income of NIC alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989),pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside .The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. (emphasis ours) Such being the case, considering that NIC holds 80% of the shares of stock of APC during the period of six months immediately preceding the date of payment of the dividends, and that the holding of the subject shares are not effectively connected with NIC-Manila as the latter is not privy to the transactions between NIC and APC, this Office is of the opinion and so holds that the dividends received by NIC is subject to the preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. This ruling is issued based on the foregoing facts as represented and is rendered only for the purpose of determining whether NIC is entitled to the benefits of the Philippines-Japan tax treaty. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be indorsed to the proper Office for processing and investigation. TaISDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service