ITAD Ruling No. 071-04

July 21, 2004 ITAD RULING NO. 071-04 Philippines-Japan tax treaty, Article 5 & 10 BIR Ruling No. 175-85; ITAD 192-02; ITAD 132-03; ITAD 137-02 FEC Development, Inc. 108 Trade Avenue, Phase 4 Special Processing Zone, Laguna Technopark Bian, Laguna Attention: Mr. Masato Miyahara President Gentlemen : This refers to your application for relief from double taxation dated December 2, 2003, on behalf of your stockholder, Furukawa Electric Company Ltd. (FECL), requesting (1) confirmation of your opinion that the dividend payments to be made by your company FEC Development Inc. (FDI) to FECL are subject to the preferential tax rate of 10%, pursuant to Article 10 of the Philippines-Japan tax treaty, and (2) for the issuance of a tax credit certificate in the amount of P277,870.77, representing overpayment of withholding tax on the dividends paid by FDI to FECL. It is represented that FECL is a corporation duly organized and existing under the laws of Japan with office address at 6-1 Marunouchi, 2-Chome, Chiyoda-ku, Tokyo, Japan; that FECL is registered and licensed to establish a representative office in the Philippines as evidenced by a certificate dated August 13, 2003 and a License to Transact Business (SEC License No. A199810861) issued by the Securities and Exchange Commission; that under the said license, the representative office of FECL was established to collect information; disseminate information; promote company products; conduct quality control of company products, market surveys, liaison and other activities of a representative office; that FDI is a. corporation duly organized and existing under the laws of the Philippines, with principal office at 108 Trade Avenue, Phase 4 Special Export Processing Zone, Bian, Laguna; that FECL is the beneficial owner of One Thousand (1,000) Class B shares and Three Thousand (3,000) Class C shares in FDI; that since April 19, 2002 FECL has been the beneficial owner of 40% of both the voting shares and the total shares issued by FDI; that on March 27, 2003 FDI declared cash dividends in the amount of Four Hundred Sixty Three Thousand One Hundred Seventeen and 95/100 (P463,117.95) for common stock (Class B) and One Million Three Hundred Eighty Nine Thousand Three Hundred Fifty three and 85/100 (P1,389,353.85) for redeemable stock (Class C) for the period covering March to December 2002; and that on June 4, 2003 and July 10, 2003 remittances in the amount of One Million Seven Hundred Ninety Three Thousand and Eighty Four pesos (P1,793,084.00) and Two Hundred Eighty Seven Thousand Five Hundred Twenty Three pesos (P287,523.00), respectively, were made to FECL. 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. 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 above mentioned provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10%, based on the gross amount of dividends, if the latter is the beneficial owner thereof and holds directly at least 25% either of the voting shares or of the total shares of the issuing company during 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% based on the gross amount of the dividends. The term "permanent establishment" is defined in Article 5 of the Philippines-Japan tax treaty which provides, to wit: "Article 5 "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes especially: a) A store or other sales outlet; b) A branch; c) An office; d) A factory; e) A workshop; f) A warehouse; g) A mine, an oil or gas well, a quarry or other place of extraction of natural resources. "3. A building site or construction or installation projects constitutes permanent establishment only if it lasts more than six months. "xxx xxx xxx" "6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State. "7. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a bona fide broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. "8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. THaDEA "xxx xxx xxx" Based on the foregoing provisions, since, as represented the activities of the said representative office are limited to collecting information; disseminating information; promoting company products; conducting quality control of company products, market surveys, liaison and other activities of a representative office, it is clear that said representative office is not deemed to constitute a permanent establishment of FECL in the Philippines. ( BIR Ruling No. 175-85 dated September 30, 1985 ) Accordingly, FECL is not deemed to have a permanent establishment in the Philippines to which its dividend income from FDI may be attributed to. ( BIR Ruling No. DA-ITAD 192-02 dated October 29, 2002 ) Therefore, your opinion that the dividend payments by FDI to FECL is subject to the preferential tax rate of 10% based on the gross amount of dividends, pursuant to Article 10 of the Philippines-Japan tax treaty is hereby confirmed. ( BIR Ruling No. DA-ITAD 132-03 dated August 26, 2003 ) This ruling is issued based on the foregoing facts as represented and is rendered only for the purpose of determining whether FECL 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service