ITAD Ruling No. 076-04

July 28, 2004 ITAD RULING NO. 076-04 Article 10, Philippines-Japan BIR Ruling No. DA ITAD 23-04 BIR Ruling No. DA ITAD 31-04 Sycip Gorres Velayo & Co . 6760 Ayala Avenue, 1226 Makati City Attention: E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated April 26, 2004, on behalf of your client, PHILIPPINE SINTER CORPORATION (PSC), requesting confirmation of your opinion that the dividend remittances by PSC to JFE STEEL CORPORATION (JSC) are subject to withholding tax at the preferential tax rate of ten (10%) percent pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that JSC is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Japan, with principal address at Hibiya Kokusai Bldg. 2-3, Uchisaiwai-cho 2-chome Chiyoda-ku, Tokyo 100-0011, Japan; that per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission (SEC) dated March 29, 2004, JSC (formerly Kawasaki Steel Corporation) was licensed to engage in business in the Philippines on November 29, 1978; that per Amended SEC License No. F-830, the change of name from Kawasaki Steel Corp. to JFE Steel Corporation was approved on July 31, 2003; that JSC has a representative office in the Philippines registered and licensed to engage in the following activities: (a) to make and conduct surveys and studies in market, economic and financial conditions in the Philippines; (b) to advice and render assistance to local distributors, investors and customers in the Philippines; and (c) to coordinate and monitor Kawasaki's various existing and proposed investments in the Philippines, as evidenced by the Certificate of Registration issued by the SEC dated November 29, 1978; that PSC is a domestic corporation organized and existing under the laws of the Philippines, registered with the Board of Investments (BOI) on a preferred pioneer status per BOI Certificate of Registration No. 75-382 dated January 29, 1975; that on April 1, 2004, the Board of Directors of PSC unanimously adopted and approved the declaration of cash dividends in the total amount of Seven Hundred Seventy Six Million Pesos (P776,000,000.00) in favor of all stockholders of record as of April 1, 2004, payable on or before September 30, 2004; that JSC owns and holds since 1974 Four Hundred Eighty Four Million Nine Hundred Ninety-Nine Thousand One Hundred (484,999,100) shares out of PSC's Four Hundred Eighty-Five Million (485,000,000) declared authorized capital stock equal to 99.9999% of PSC's total issued and outstanding shares. 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. "5. The provisions of paragraphs (1),(2) and (3) shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. ScEaAD "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% based on the gross amount of dividends 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, and/or if the Philippine company is a BOI-registered enterprise 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. In the instant case, while the JSC maintains a representative office in the Philippines, it is represented that said office is not privy and does not have any participation whatsoever in the holding of JSC's shares of stocks in PSC. Such being the case, any income derived by JSC independently of its representative office shall be considered income of JSC 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 JSC holds directly 99.9999% of the shares of stock of PSC 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 JSC's representative office as the latter is not privy to the transactions between JSC and PSC, and considering further that the latter company is a BOI-registered enterprise engaged in preferred pioneer areas of investment, this Office is of the opinion and so holds that the dividends received by JSC are subject to the preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) and (3) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 23-04 dated March 9, 2004 and BIR Ruling No. DA-ITAD 31-04 dated April 2, 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service