ITAD Ruling No. 129-01

December 21, 2001 ITAD RULING NO. 129-01 RP-Japan, Art. 10 BIR Ruling No. ITAD-156-00 Sycip Gorres Velayo & Co. 3rd Flr. Insular Life Building Cor. Gerardo and Gen. Maxilom Avenues Cebu City Attention: Atty. Asuncion S. Fernandez Tax Division Gentlemen : This refers to your letters dated December 18, 2000 and May 29, 2001 requesting confirmation of your opinion on behalf of the following stockholders for tax treaty relief on the preferential tax rate of withholding tax on the cash dividends as remitted by Philippine Keno Corporation (PKC) pursuant to Article 10(2)(a) of the RP-Japan Tax Treaty: Name of Stockholders Withholding Tax Rate 1. Kenko Company Limited ("Kenko") 10% 2. JAIC-1 Investment Enterprise Partnership ("JAIC-1") 25% 3. JAIC-2(A) Investment Enterprise Partnership ("JAIC-2(A)") 25% 4. JAIC-2(B) Investment Enterprise Partnership ("JAIC-2(B)") 25% 5. JAIC-2(C) Investment Enterprise Partnership ("JAIC-2(C)") 25% It is represented that PKC is a domestic corporation organized and existing under Philippine laws with principal office at Mactan Economic Zone, Lapu-Lapu City; that Kenko is a non-resident corporation organized and existing under the laws of Japan with principal office at Nishi-Ochiai 3-9-19, Shinjuku-Ku, Tokyo, Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines per certification dated January 30, 2001 issued by the Securities & Exchange Commission; that JAIC-1, JAIC-2(A), JAIC-2(B) and JAIC-2(C) are investments managed by Japan Asia Investment Co., Ltd., a non-resident foreign partnership organized and existing under the laws of Japan with principal office at 7th Floor Kochimachi Tsuruyahchiman Bldg., 4, Kojimachi 2-Chome, Tokyo, Japan; that they are not registered as corporations/partnerships licensed to do business in the Philippines per certification dated January 6, 2001 issued by the Securities & Exchange Commission; that on December 5, 2000, the Board of Directors of PKC declared cash dividends of 10% of the issued and outstanding shares of stock to its shareholders of records as of October 31, 2000 in the amount of PHP 14,100,000.00 of which P14,099,869.80 pertains to its non-resident foreign shareholders; that the payment of the said dividends was made on January 19, 2001; and that for the period April 30, 2000 up to April 30, 2001, the following are the composition of the shareholdings in PKC by its various shareholders, the corresponding percentage of ownership and amount of cash dividends derived by them in the said declaration of dividends: No. of Shares Amount of Shares percentage Amount of Cash Subscribed Subscribed of Ownership Dividend (10% of the issued and outstanding shares of stock) 1. Kenko 80,220,280 80,220,280 56.89% P8,022,028.00 2. JAIC-1 24,044,210 24,044,210 17.00% 2,404,421.00 3. JAIC-2(A) 12,244,736 12,244,736 8.68% 1,224,473.60 4. JAIC-2(B) 12,244,736 12,244,736 8.68% 1,224,473.60 5. JAIC-2(C) 12,244,736 12,244,736 8.68% 1,224,473.60 6. Toru. Yamanaka 186 186 0.01% 18.60 7. Asao Sekiai 186 186 0.01% 18.60 8. M. Asami 186 186 0.01% 18.60 9. M. Higashida 186 186 0.01% 18.60 10. C. Lauglaug 186 186 0.01% 18.60 11. K Onodera 186 186 0.01% 18.60 12. Totarou Suga 186 186 0.01% 18.60 TOTAL P141,000,000 P141,000,000 100% P141,000,000 In reply, please be informed that pursuant to 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 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. ADCEcI 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. . . . Based on the above, the Philippines may tax the dividends paid by a Philippine company to a Japanese resident at a rate not exceeding 10 percent of the gross amount of the dividends if the latter holds 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 and at a rate not exceeding 25 percent of the gross amount of the dividends, in all other cases. In view of the foregoing, considering that Kenko holds directly 56.89 percent of the outstanding capital stock of PKC for a period of more than six months before the latter's declaration and payment of the dividends, the remittance of cash dividends in the amount of P8,022,028.00 by PKC to Kenko shall be subject to 10 percent withholding tax pursuant to Article 10(2)(a) of the RP-Japan Tax Treaty. (BIR Ruling No. ITAD 156-00) On the other hand, the cash dividends remitted to JAIC-1, and JAIC-2(A), JAIC-2(B) and JAIC-2(C), which respectively own less than 25 percent of the outstanding capital stock of PKC, shall be subject to tax at 25 percent of the gross amount of the dividends. 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 and Inspection Group