ITAD Ruling No. 053-05

June 15, 2005 ITAD RULING NO. 053-05 Art. 10, Philippines-Japan Tax treaty BIR Ruling No. DA-ITAD 76-04 Asian Insights, Inc . Unit 408, Ferros Bel-Air Tower 30 Polaris corner Durban Streets Bel-air, Makati City Attention: Teresa R. Tam-Yap Gentlemen : This refers to your letter dated January 5, 2004 received by this Office on January 12, 2005 on behalf of your client, Shimizu Philippine Contractors, Inc. (Shimizu-Phil.), concerning the applicable tax rate on the dividend remittances by Shimizu Phil. to Shimizu Corporation (Shimizu-Japan) pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. It is represented that Shimizu-Japan is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Japan, with principal office address at Seavans South, No. 2-3 Shibaura, 1-Chome, Minato-Ku, Tokyo 105-8007 Japan; that per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission (SEC) dated December 17, 2004, Shimizu-Japan with SEC No. AF93-37 was licensed to engage in business in the Philippines on July 30, 1993; that Shimizu-Phil. is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at 5th Flr., King's Court I Bldg., 2129 Pasong Tamo Street, Makati City; that on November 10, 2004, the Board of Directors of Shimizu-Phil. approved the declaration of cash dividends in the amount of One Hundred Million Pesos (P100,000,000.00) payable to all of stockholders of Shimizu-Phil. on record as of October 31, 2004; that Shimizu-Japan owns and holds One Thousand Nine Hundred Ninety Seven (1,997) shares amounting to Forty Six Million Nine Hundred Twenty Nine Thousand Five Hundred Pesos (P46,929,500.00) out of the Five Thousand (5,000) total shares or an equivalent to 39.94% of the total issued and outstanding shares of Shimizu-Phil.; that Shimizu-Japan has been the holder of the abovementioned number of shares for more than six (6) months immediately preceding the date of payment of the dividends by Shimizu-Phil. as confirmed in the duly notarized Certificate issued by the Corporate Secretary of Shimizu-Phil. dated February 1, 2005; and that the Philippine branch of Shimizu-Japan had no participation, whatsoever, in the acquisition of the shares in Shimizu-Phil. by Shimizu-Japan as the said acquisition was the sole act of the latter and such fact is attested to in the duly notarized Certificate issued by the Corporate Secretary of Shimizu-Phil. dated January 31, 2005. In reply, please be informed that Article 10 of the Philippines-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. CIDaTc 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. "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. "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 aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the voting shares or of the total shares of the first-mentioned company for a period of six months immediately preceding the date of payment of the dividends, and/or if the dividends are paid by a company which is registered with the Philippine Board of Investments (BOI) and engaged in preferred pioneer areas of investment; or at a rate of 25% of the gross amount of dividends in all other cases. However, the said 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. cSTHaE In the instant case, while Shimizu-Japan maintains a branch office in the Philippines, it is represented that said branch office is not privy and does not have any participation whatsoever in the holding of shares of stock in Shimizu-Phil.. Such being the case, any income derived by Shimizu-Japan independently of its branch office shall be considered income of Shimizu-Japan 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) In view thereof, since Shimizu-Japan holds directly 39.94% of the shares of stock of Shimizu-Phil. 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 Shimizu-Japan's branch office since the latter is not privy to the transactions between Shimizu-Japan and Shimizu-Phil., this Office is of the opinion and so holds that the dividends received by Shimizu-Japan pursuant to Shimizu-Phil.'s BOD Resolution No. 2004-24 are 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. (BIR Ruling No. DA-ITAD 76-04 dated July 28, 2004) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service