ITAD Ruling No. 067-03

May 5, 2003 ITAD RULING NO. 067-03 Art. 11, RP-Japan tax treaty BIR Ruling No. DA-ITAD 138-02 Laguna Auto-Parts Manufacturing Corporation 102 South Science Avenue, Laguna Technopark, Bo. Don Jose Sta. Rosa, Laguna Attention: Ms. Ester L. Reverente Vice President Gentlemen : This refers to your letter dated September 23, 2002, requesting confirmation of your opinion that the dividend payments by Laguna Auto-Parts Manufacturing Corporation (LAMCOR) to Mitsubishi Electric Corporation (Mitsubishi Electric) and Mitsubishi Corporation (Mitsubishi Corp) are subject to 10% and 25% preferential tax rates, respectively, pursuant to the RP-Japan tax treaty. It is represented that Mitsubishi Electric is a corporation duly organized and existing under the laws of Japan with principal address at 2-3 Marunouchi, 2-chome, Chiyoda-ku, Tokyo 100-8310, 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 certified by the Securities and Exchange Commission dated December 11, 2002; that Mitsubishi Corp is a corporation organized and existing under the laws of Japan with principal address at 6-3 Marunouchi, 2-chome, Chiyoda-ku, Tokyo 100-8086, 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 certified by the Securities and Exchange Commission dated December 11, 2002; that LAMCOR is a corporation organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) with principal address at 102 South Science Avenue, Laguna Technopark, Sta Rosa, Laguna; that Mitsubishi Electric and Mitsubishi Corp hold 74% and 16%, respectively, of the outstanding capital stock of LAMCOR; that the said shares of Mitsubishi Electric and Mitsubishi Corp were acquired since March 17, 1992; and that on July 30, 2002, the Board of Directors of LAMCOR declared a cash dividends at 12% of the issued and outstanding capital stock of the corporation or in the total amount of Twenty Six Million Eight Hundred Eighty Thousand (P26,880,000.00); and that the proportionate amount of P19,891,200 and P4,300,800 shall be distributed to Mitsubishi Electric and Mitsubishi Corp., respectively. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides: "Article 10" "Dividends" "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; TAIESD "(b) 25 per cent of the gross amount of the dividends in all other cases. "xxx xxx xxx "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 aforequoted provisions, dividends paid by a Philippine company to a resident of Japan may be taxed at a rate not exceeding 10 per cent of the gross amount of the dividends if the recipient is a company which holds directly at least 25% either of the voting shares or of the total shares of the issuing company for the period of six months immediately preceding the date of payment of the dividends. In all other cases, the tax rate to be imposed shall be 25% of the gross amount of the dividends. ( BIR Ruling No. DA-ITAD-138-02 dated August 6, 2002 ) In view thereof, since Mitsubishi Electric and Mitsubishi Corp respectively hold 74% and 16% of the outstanding capital stock of LAMCOR for the period of six months immediately preceding the date of payments of the dividends, this Office is of the opinion and so holds that the dividend payments by LAMCOR to Mitsubishi Electric and Mitsubishi Corp are subject to the preferential rates of 10% and 25%, respectively, pursuant to 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