ITAD Ruling No. 098-04

September 3, 2004 ITAD RULING NO. 098-04 Article 10, Philippines-Japan tax treaty BIR Ruling No. ITAD 47-99 BIR Ruling No. DA-ITAD-137-02 Philippine-Japan Active Carbon Corporation Malagamot, Panacan P.O. Box 81316 Davao City Attention: Mr. Masahiko Saeki EVP & General Manager Gentlemen : This refers to your application for relief from double taxation dated March 4, 2004, on the dividend payments of Philippine-Japan Active Carbon Corporation (PJAC) to Futamura Chemicals Industries Co. Ltd. (Futamura), pursuant to the Philippines-Japan tax treaty. It is represented that Futamura is a corporation duly organized and existing under the laws of Japan, with principal office at 29-16, Meieki 2 Chome Nagoya, Japan; that per certification issued by the Securities and Exchange Commission dated February 11, 2004, Futamura is not registered either as a corporation or a partnership licensed to engage in business in the Philippines; that PJAC is a BOI-registered corporation with principal address at Malagamot, Panacan, Bunawan, Davao; that since August 7, 2000, Futamura holds Five Hundred Thirty Five Thousand Nine Hundred Fifty (535,950) shares of stock equivalent to Fifty Three Million Five Hundred Ninety Five Thousand pesos (P53,595,000.00) representing forty nine and 95/100 percent (49.95%) of the capital stock of PJAC as of March 30, 2004; that on December 29, 2003, the Board of Directors of PJAC passed and approved the declaration of cash dividends in the amount of five pesos per share (P5.00/share) to the stockholders of record as of December 31, 2003 and shall be payable on or before March 30, 2004. In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides as follows: "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 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 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 aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding ten per cent (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, or if the Philippine Company is registered with the Board of Investments (BOI) and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. In view thereof, and since Futamura directly holds 49.95% of the shares of stock of PJAC for the period of six (6) months before the date of payment of the dividends and that PJAC is a BOI-registered corporation and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, the said dividends to be paid by PJAC to Futamura are subject to the 10 percent preferential tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD No. 47-99 dated December 9, 1999 and BIR Ruling No. DA-ITAD-137-02 dated August 6, 2002) 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. EIASDT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service