ITAD Ruling No. 094-00

August 1, 2000 ITAD RULING NO. 094-00 RP-Japan Article 10 ITAD Ruling No. 31-00 BIR Ruling 010-84 Daitoh Precisions, Inc. 3rd Avenue, 5th Street PEZA, Lapu-Lapu City Cebu, Philippines Attention: Marivic A . Tizon Accounting Manager Gentlemen : This refers to your application for relief from double taxation dated December 1, 1999 on behalf of Daitoh Seimitsu Company Ltd. (Daitoh) requesting for a preferential tax rate of ten percent (10%) to be withheld on dividend remittances by Daitoh Precisions Inc. (DPI) through offset of accounts pursuant to RP-Japan Tax Treaty. It is represented that DPI is a PEZA registered enterprise organized and existing under the laws of the Philippines; that Daitoh is a non-resident foreign corporation duly organized and existing under the laws of Japan; that Daitoh is not registered as a corporation/partnership in the Philippines as per certification dated November 9, 1999 issued by the Securities and Exchange Commission; that DPI is 99% owned by Daitoh; that on April 12 1999, the Board of Directors of DPI passed and approved the declaration of stock dividends to its shareholders in the amount of FIFTEEN MILLION PESOS (PHP 15,000,000.00) and cash dividends in the amount of SEVENTY-SIX MILLION PESOS (PHP 76,000,000.00); and that the said dividends shall be settled/paid through offset of accounts. In reply please be informed that Article 10 of the RP-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; cdlex (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. 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." Based on the foregoing, dividends paid by a Philippine corporation to a resident of Japan may be taxed at the rate of 10 per cent of the gross amount of dividends if the beneficial owner (Japanese resident) is a company which holds directly at least 25 per cent of the voting shares or total shares issued by the Philippine corporation during the period of six months immediately preceding the date of payment of dividends. Since Daitoh is the recipient and the beneficial owner of the dividends and owns 99.9% of the outstanding shares of the voting stock of the paying company (DPI), as evidenced by the Secretary's Certificate dated November 19, 1999, the said stock dividends in the amount of PHP 14,985,000.00 out of the total PHP 15,000,000.00 and cash dividends in the amount of PHP 75,924,000.00 out of the total PHP 76,000,000.00 are subject to 10% final withholding tax rate pursuant to the above-quoted provision of RP-Japan Tax Treaty. [ITAD Ruling No. 31-00; BIR Ruling No. 010-84] This ruling is being issued based on the foregoing representations. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) LILIAN B. HEFTI OIC, Deputy Commissioner Legal and Inspection Group