ITAD Ruling No. 107-00

August 9, 2000 ITAD RULING NO. 107-00 RP-Japan Art. 10 ITAD 49-99 The Bengzon Firm SOL Building 112 Amorsolo St Legaspi Village 1229 Makati City Attention: Atty. Hubert E. Molina Atty. Victoria T. Lim Kico Gentlemen : This refers to your letter dated October 26 1999, requesting for confirmation/ruling on the application of the 10% preferential tax rate to be withheld from the dividend remittances of Sagara Metro Plastics Industrial Corp. ("Metro") to Sagara Plastics Industrial Co. Ltd. ("Plastics") and to individual Japanese stockholders pursuant to Article 10 (2) (a) of the RP-Japan Tax Treaty. CIHTac It is represented that Metro is a domestic corporation organized and existing under the laws of the Philippines with office address at Brgy. Paciano Rizal, Calamba, Laguna; that Plastics is a non-resident foreign corporation domiciled in Japan with business address at 4371120 Hirooka Fukuroi-shi, Shizuoka, Japan; that Plastics owns 81,360 shares of stock with a par value of PhP1,000.00 per share which represent approximately 88.44% of the total outstanding shares of stock of Metro; and that on September 7, 1999, Metro's Board of Directors approved the declaration of cash dividends equivalent to 20% of the retained earnings as of June 30, 1999 in favor of Metro shareholders in the amount of Two Million Five Hundred Forty Seven Thousand Two Hundred Eighty Seven Pesos (PhP2,547,287.00) per Secretary's Certificate dated January 29, 2000. In reply please be informed that Article 10 of the RP-Japan Tax Treaty provides: "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 that 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) . . . (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." ESDHCa In view of the foregoing, and since Plastics owns 88.44% of the total outstanding stocks of Metro, the cash dividends payable by Metro to Plastics are subject to 10% withholding tax. However, Secretary's Certificate showing the stockholders' value and number of common shares as of September 2, 1999, provides that the four (4) individual Japanese stockholders of Metro, namely, Tomohide Sagara, Hisako Sagara, Tadashi Osumi and Takayuki Ishikawa owns 590, 20, 10 and 10 shares of stock of Metro, respectively, and since each of whom represents less than 25% of Metro's outstanding stocks, the cash dividends payable by Metro to the four (4) individual Japanese stockholders are subject to 25% withholding tax pursuant to Article 10(2)(b) of the RP-Japan Tax Treaty. This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group