ITAD Ruling No. 087-03

June 30, 2003 ITAD RULING NO. 087-03 Article 10, RP-Japan BIR Ruling No. DA-ITAD 75-03 Phil.-Japan Active Carbon Corporation 5th Floor Don Pablo Bldg., Amorsolo St. Legaspi Village, Makati City Attention: Mr. Masahiko Saeki EVP & Gen. Manager Gentlemen : This refers to your letter dated January 20, 2003, requesting that the preferential tax rate of 10% be applied on the dividend payments of Philippine-Japan Active Carbon Corporation (PJAC) to Futamura Chemicals Industries Co. Ltd. (Futamura-Japan) pursuant to Article 10(2)(a) of the RP-Japan tax treaty. It is represented that Futamura-Japan is a corporation duly organized and existing under the laws of Japan, with business address at 29-16 Meieki 2 Chome, Nakamuraku, Nagoya, 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 dated March 22, 2002; that PJAC is a domestic corporation with principal address located in Malagamot, Panacan, Bunawan, Davao; that as of January 17, 2003, Futamura-Japan holds 535,950 shares valued at Fifty Three Million Five Hundred Ninety-Five Thousand Pesos (P53,595,000.00) and constituting 49.95% of ownership in PJAC; that on December 27, 2002, at a Special Meeting of the Board of Directors of PJAC, a resolution was passed and approved declaring P5.00/share cash dividend to the stockholders on record as of December 31, 2002 and be payable on or before March 30, 2003. 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 charge 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; EcATDH (b) 25 percent 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. xxx xxx xxx "(4) The term 'dividends' is 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 ten percent (10%) if the latter holds directly at least 25 percent (25%) either of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends. In view thereof, and since Futamura-Japan directly holds 49.95% of the shares of stock of PJAC for a period of six (6) months before the declaration of dividends, said dividends to be paid by PJAC to Futamura-Japan are subject to the 10 percent preferential tax rate pursuant to Article 10(2)(a) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD 75-03 dated June 3, 2003 ) 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