ITAD Ruling No. 057-02

April 24, 2002 ITAD RULING NO. 057-02 Article 10, RP-Japan BIR Ruling No. ITAD-07-01 JS Steel Cebu Corporation Mactan Economic Zone, Lapu-Lapu, Cebu City Attention: Masao Sekiuchi President Gentlemen : This refers to your letter dated July 9, 2001, requesting confirmation of your opinion that dividends to be remitted by JS STEEL CEBU CORPORATION ("JS Steel") to SUMITOMO CORPORATION ("Sumitomo-Japan"), are subject to the 10% tax rate pursuant to the RP-Japan tax treaty. It is represented that Sumitomo-Japan is a corporation duly organized and existing under the laws of Japan, with business address at 1-8-11 Harumi, Chuo-ku, Tokyo, Japan; that the investment was made directly by Sumitomo-Japan and not through its Philippine Branch Sumitomo Corporation-Manila; that JS Steel is a domestic corporation, with principal place of business at the Mactan Economic Zone-I, Lapu-Lapu City, Cebu; that JS Steel is registered with the Philippine Economic Zone Authority under Certificate of Registration No. 94-76, dated September, 28, 1994; that it is engaged in the manufacture and processing of metal sheet, coils into sheared and slitted metals; that on March 23, 2001, the Board of Directors of JS Steel passed and approved the declaration of cash dividends equivalent to the amount of One Hundred Twenty Two Million Eight Hundred Twenty Three Thousand Five Hundred Ninety Seven Pesos and Sixty Three Centavos (Php122,823,597.63), payable to stockholders of record of which Sumitomo-Japan owns 80% of the total shares. In reply, please be informed that Article 10 of the RP-Japan Tax Treaty provides, viz : "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 ours) "(b) 25 per cent of the gross amount of the dividends in all other cases. STcaDI 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. "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 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 either 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; otherwise, said dividends may be taxed at a rate not exceeding 25 per cent of the gross amount in all other cases. Moreover, in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), it was held that: "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." Based on the foregoing provisions, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by JS Steel to Sumitomo-Japan shall be considered as income of Sumitomo-Japan as ruled in the aforecited case of Marubeni vs. CIR (G.R. No. 76573). In view thereof, since Sumitomo holds directly 80% of the voting shares of JS Steel Corporation for a period of six months before the latter declared dividends, said dividends paid by JS Steel Corporation to Sumitomo are subject to 10 percent preferential tax rate pursuant to the RP-Japan Tax Treaty. (BIR Ruling No. ITAD-07-01 dated February 12, 2001) 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 rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service