ITAD Ruling No. 122-04

November 3, 2004 ITAD RULING NO. 122-04 Article 10, Philippines-Japan tax treaty BIR Ruling No. DA-ITAD 118-03 Luis Caete & Company 3f Oftaba Bldg., Jasmin cor Don Mariano Cui Streets Cebu City Attention: Luis A. Caete Gentlemen : This refers to your letter dated August 20, 2004 requesting for a preferential tax rate of ten percent (10%) on the dividend payment of Tsuneishi Heavy Industries (Cebu) Inc. (THICI) to Tsuneishi Corporation (TSCO), pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that TSCO, formerly Tsuneishi Shipbuilding Co., Ltd, is a non-resident foreign corporation duly organized and existing under the laws of Japan, with principal office at 1083 Tsuneishi, Numakuma-Cho, Numakuma-Gun, Hiroshima Prefecture, 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 Securities and Exchange Commission dated August 20, 2004; that TSCO is a domestic corporation organized and existing under the laws of the Philippines with principal address located in West Cebu Industrial Park Special Economic Zone, Balamban, Cebu; that as of December 17, 2003, TSCO owns One Hundred Seventy-nine Million Nine Hundred Ninety-nine Thousand, Nine Hundred Ninety-five (179,999,995) shares of stock of THICI with a par value of P1.00 per share representing 60% of the total outstanding capital of THICI; that as of May 17, 2004, TSCO's number of shares in THICI increased to Two Hundred Twenty-four Million, Nine Hundred Ninety-nine Thousand, Nine Hundred Ninety-five (224,999,995) shares with a total amount of Two Hundred Twenty-four Million, Nine Hundred Ninety-nine Thousand, Nine Hundred Ninety-five Pesos (P224,999,995.00); that on May 21, 2004, the Board of Directors of THICI resolved and approved the declaration of cash dividends in the amount of Fifteen Million Pesos (P15,000,000.00) from the corporation's unrestricted retained earnings as of December 31, 2003, to be issued pro-rata to all stockholders of records as of the close of business hours on May 17, 2004, payable on or before June 21, 2004. STHAaD 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. 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. "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 abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds directly at least 25 percent either of the voting shares or of the total shares of the issuing company during the period of six (6) months immediately preceding the date of payment of the dividends. Considering that as of December 17, 2003, which is 6 months from date of payment of the subject dividends, TSCO, directly holds 60% of the total shares of THICI, this Office is of the opinion as it hereby holds that the dividend payments of THICI to TSCO are subject to the 10% preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD-118-03-99 dated August 4, 2003) This ruling is issued based on 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. DHSCEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service