ITAD Ruling No. 055-03

April 15, 2003 ITAD RULING NO. 055-03 Article 10, RP-Japan Sec. 108, NIRC BIR Ruling No. DA-ITAD No. 110-02 BIR Ruling No. DA-ITAD No. 83-02 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City, Manila Attention: Mr. George J. Lavadia Principal, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated March 6, 2003 on behalf of your client, TDK Philippines Corporation (TDK Phil), requesting confirmation of your opinion that the dividend payments of TDK Phil to TDK Corporation-Japan (TDK Japan) are subject to the preferential tax rate of 10% pursuant to Article 10 of the RP-Japan tax treaty. It is represented that TDK Japan is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Japan with principal address at 13-1 Nihonbashi 1-Chome, Chuo-ku Tokyo, 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 per certification issued by the Securities and Exchange Commission (SEC) dated March 24, 2003; that TDK Phil, on the other hand, is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with office address at 119 East Science Avenue Special Export Processing Zone, Laguna Technopark, Bian, Laguna; that TDK Phil is a wholly-owned subsidiary of TDK Japan; that as of March 25, 2003, TDK Japan directly holds and owns thirteen million eight hundred twenty-nine thousand nine hundred ninety-five (13,829,995) shares equivalent to One Billion Three Hundred Eighty Two Million Nine Hundred Ninety Nine Thousand Five Hundred Pesos (Php1,382,999,500.00); that the shareholdings of TDK Japan in TDK Phil, including the five nominee shares, represent 100% of the capital stock of TDK Phil; and that the Board of Directors of TDK Phil intends to declare cash dividends out of its restricted retained earnings in June 2003. 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. 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" 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% 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. ( BIR Ruling No. ITAD 110-02 dated May 30, 2002 ). HAIaEc In view thereof, and if TDK Japan remains the beneficial owner which holds directly at least 25% of the total shares of TDK Phil for a period of at least six (6) months immediately preceding the intended date of payment of dividends to be declared in June 2003, the dividends to be paid by TDK Phil to TDK Japan will be subject to a preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the RP-Japan tax treaty. It is understood that the obligations to deduct and withhold the tax arises at the time that the cash dividend is paid or payable, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Accordingly, the obligations to deduct and withhold the tax arise at the time the cash dividends become payable in accordance with the terms of the resolution of the Board of Directors. Also, the due date is within 10 days from the end of month that it becomes paid or payable. ( BIR Ruling No. DA-ITAD-83-02 dated May 2, 2002 ) 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