ITAD Ruling No. 106-01

October 30, 2001 ITAD RULING NO. 106-01 Article 10, RP-Japan BIR Ruling No. ITAD-143-00 Aichi Forging Co. of Asia Barrio Pulong, Sta. Cruz, Santa Rosa, Laguna Attention: Mr. Takashi Wanya EVP-Finance Gentlemen : This refers to your application for relief from double taxation dated May 8, 2001, that your dividend payments to be made to Aichi Steel Corporation are subject to the preferential withholding tax rate of ten (10%) per cent, pursuant to Article 10 of the RP-Japan Tax Treaty. It is represented that Aichi Steel Corp. (Aichi Japan) is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Japan with principal address at 1 Wano-Wari Arao-Machi, Tokai-Shi, Aichi-Ken, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated April 17, 2001; that Aichi Forging Co. of Asia Inc. (Aichi Phils.) is a domestic corporation organized and existing under the laws of the Philippines with office address at Barrio Pulong, Sta. Cruz, Santa Rosa, Laguna; that Aichi Phils. is registered with the Board of Investments as a preferred pioneer enterprise engaged in the manufacture of closed impression die steel forging and expanding producer of tools and dies as per Certificate of Registration No. EP-95-132 dated June 8, 1995; that Aichi Japan holds 61.75% of the total shares of Aichi Phils. amounting to Two Hundred Fifty-Three Million Eight Hundred Nine Thousand Nine Hundred Sixty Pesos (Php 253,809,960.00); that as per certification dated March 27, 2001 of Aichi Phils.' Corporate Secretary, Ms. Aissa V. Encarnacion, Aichi Japan is a stockholder of record of Aichi Phils. as of March 3, 2001; that Aichi Phils.' Board of Directors declared cash dividends at the rate of 46% of the unrestricted retained earnings in the amount of Thirty-One Million Five Hundred Seventy-Seven Thousand One Hundred Sixty-Nine Pesos (Php31,577,169.00) to stockholders of record as of February 28, 2001 which includes Aichi Japan as evidenced by the Board Resolution dated March 2, 2001. 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 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. 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. 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% 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. Considering that Aichi Japan owns directly 61.75% of the total shares of Aichi Phils. for a period of six (6) months immediately preceding the date of payment of dividends, the cash dividends payable by Aichi Phils. to Aichi Japan are subject to a preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(a) of the RP-Japan Tax Treaty. (BIR Ruling No. ITAD 143-00 dated September 28, 2000) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group