ITAD Ruling No. 117-01

November 29, 2001 ITAD RULING NO. 117-01 RP-Japan Tax Treaty Art. 10 BIR Ruling No. ITAD 7-01 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. George J. Lavadia Principal Tax Services Department Gentlemen : This refers to your letter dated June 6, 2001 on behalf of your client, Nippon Express Philippines Inc. (NEPC), requesting for a ruling that the cash dividends to be remitted by NEPC to its parent company, Nippon Express Co. Ltd. (Japan) (NECL) are subject to the preferential tax rate of 10% pursuant to the RP-Japan Tax Treaty. It is represented that NECL is a non-resident foreign corporation duly organized and existing under the laws of Japan with business address at 3-12-9, Sotokanda Chiyoda-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Securities and Exchange Commission certificate dated April 26, 2001; that NEPC is a corporation duly organized and existing under the laws of the Philippines with business address at Suite 2701, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave., Makati City; that NEPC has an authorized capital of Two Hundred Twenty Five Million Pesos (P225,000,000.00) divided into: (a) one million one hundred six thousand six hundred thirteen (1,106,613) Class "A" Preferred shares with a par value of Ten Pesos (P10.00) each; and (b) seven hundred thirty seven thousand seven hundred three (737,703) Class "B" Common shares with a par value of Two Hundred Ninety Pesos (P290.00) per share; and that out of the total authorized capital stock, the following shares are outstanding: (a) three hundred nine thousand eight hundred thirty seven (309,837) Class "A" Preferred shares, and (b) two hundred six thousand five hundred fifty eight (206,558) Class "B" Common shares, which represent 40% of the outstanding voting shares of stock and are owned/held by NECL. In reply, please be informed that Article 10 of the RP-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. "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. "xxx xxx xxx" Based on the above, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 per cent if the last-mentioned company holds directly at least 25 per cent either of the voting shares or of the total shares of the first-mentioned company during a period of six months immediately preceding the date of payment of the dividends. In view of the foregoing, since NECL holds directly 40% of the voting shares of NEPC during a period of six months before the latter declared dividends, your opinion that the cash dividends to be remitted by NEPC to NECL are subject to the 10% preferential tax rate under the Philippines-Japan Tax Treaty is hereby confirmed. It is understood that the obligations to deduct and withhold the tax arises at the time that the cash dividend is paid or payable, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Accordingly, the obligations to deduct and withhold the tax arise at the time the cash dividends become payable in accordance with the terms of the resolution of the Board of Directors. Also, the due date is within 10 days from end of month that it becomes paid or payable. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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 and Inspection Group