ITAD Ruling No. 110-05

September 21, 2005 ITAD RULING NO. 110-05 Article 10, Philippines-Japan tax treaty BIR Ruling No. DA ITAD 31-04 Ito-Seisakusho Philippines Corporation Lot C2-1B, Carmelray Industrial Park II Km. 54 National Highway, Barangay Tulo & Punta Calamba City, Laguna, Philippines 4027 Attention: Mr. Tsuyoshi Kawasaki Vice President Ms. Rose Andrion General Manager Gentlemen : This refers to your letter dated February 10, 2005 requesting the approval of your application for relief from double taxation on dividends, pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Ito-Seisakusho Co. Ltd. (ISCL) is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 101 Hironagacho, Yokkaichi City, Mie, Japan; that it is 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 February 17, 2005; that Ito-Seisakusho Phils. Corp. (ISPC), formerly ITO-FGI Corporation, is a domestic corporation organized and existing under laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 02-017 dated January 9, 2003; that during the meeting of the Board of Directors of ISPC held on December 31, 2004, it was resolved that dividends in the amount of One Million Pesos (Php1,000,000.00) be declared and paid on or before March 31, 2005 to the stockholders on record as of December 31, 2004; and that it was further resolved and certified that ISCL holds 80% of the total share of stocks issued by ISPC during the period of six months immediately preceding actual payment of dividends on April 12, 2005. CaSAcH In reply, please be informed that Article 10 of the Philippines-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; 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 above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividend owns directly at least 25 percent 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. In all other cases, the 25 percent preferential tax rate applies. Such being the case, and considering that ISCL held 80% percent of the total shares of stock issued by ISPC during the period of six (6) months immediately preceding April 12, 2005, the date of the actual payment of the dividends by ISPC, this Office is of the opinion and so holds that the dividend payments by ISPC to ISPL shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA ITAD 31-04 dated April 2, 2004) ISDHcT 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service