ITAD Ruling No. 096-04

September 2, 2004 ITAD RULING NO. 096-04 Article 10, Philippines-Netherlands tax treaty Article 10, Philippines-Japan tax treaty BIR Ruling No. DA-ITAD-164-02 BIR Ruling No DA-ITAD-50-03 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated August 9, 2004, requesting confirmation of your opinion that the dividend payments of your client, San Roque Power Corporation (SRPC), to Marubeni Corporation (MC) and KPIC Netherlands B.V. (KPIC Netherlands), are subject to the preferential tax rate of 10% and 15%, respectively, of the gross amount of dividends pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty and Philippines-Netherlands tax treaty. It is represented that MC is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Japan with principal office address at 4-2 Ohtemachi I-chome, Chiyoda-ku, Tokyo, Japan; that MC is not registered either as corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 11, 2004, that KPIC Netherlands is a nonresident foreign corporation duly organized and existing under the laws of Netherlands with office address at De Boelelaan 7 Officia 1, 1083HJ Amsterdam, Netherlands; that KPIC Netherlands is likewise not registered either as a corporation or as a partnership licensed to do business in the Philippines, per certification issued by the Securities and Exchange Commission dated August 11, 2004; that SRPC is a domestic corporation organized and existing under Philippine laws duly registered with the Board of Investments (BOI) on a preferred pioneer status, to engage in the design, construction, erection, assembly, as well as to own, commission, and operate electric power-generating plants and other related activities; that MC and KPIC Netherlands are stockholders of record of SRPC, as follows: Name of No. of Shares Type of Shares Percentage Corporation Ownership MC 827 Common 42.45 939,131 Preferred KPIC 150 Common 7.50 Netherlands 165,924 Preferred and that per Certification issued by the Corporate Secretary of SRPC dated August 6, 2004, the 42.45% ownership of MC has been held for more than six (6) months and remains unchanged until the date of said certification. It is further represented that on August 6, 2004, the Board of Directors of SRPC declared cash dividends in the amount of Japanese Yen 325.3219 and US$ 21.8440 per share in favor of all of its stockholders of record as of June 31, * 2004. In reply, please be informed that Article 10 of the Philippines-Japan and Philippines-Netherlands tax treaties provide as follows: Philippines-Japan tax treaty "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 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 ; (Emphasis supplied) b) 75 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 only 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 . (emphasis supplied) "xxx xxx xxx" Philippines-Netherlands tax treaty "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends ; (emphasis supplied) b) 15 per cent of the gross amount of the dividends in all other cases. "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% of the gross amount of dividends if the last-mentioned company, who is the beneficial owner of the dividends, holds directly at least 25% 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, or if the Philippine company is registered with the Board of Investments and engaged in preferred pioneer areas of investment, and at the rate of 25% of the gross amount of dividends in all other cases. On the other hand, dividends paid by a Philippine company to a resident of The Netherlands may be taxed at a rate not exceeding 10% of the gross amount of dividends if the recipient is the beneficial owner of such dividends which holds directly at least 10% of the capital of the Philippine company, and at the rate of 15% in all other cases. Accordingly, considering that MC holds 42.45% of the outstanding capital stock in SRPC during the period of 6 months immediately preceding the date of payment of the dividends and SRPCC is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the incentives laws of the Philippines, this Office is of the opinion and so holds that the dividend remittances of SRPC to MC are subject to a preferential rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. On the other hand, since KPIC Netherlands holds only 7.50% of the outstanding capital stock in SRPC, the dividends received by KPIC Netherlands are subject to the preferential tax rate of 15% of the gross amount of dividends pursuant to Article 10(2)(b) of the Philippines-Netherlands tax treaty. ( BIR Ruling No. DA-ITAD-164-02 dated September 3, 2002 and BIR Ruling No. DA-ITAD-50-03 dated April 8, 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