ITAD Ruling No. 132-03

August 26, 2003 ITAD RULING NO. 132-03 Art. 10, RP-Japan tax treaty BIR Ruling No. DA-ITAD-67-03 Bernaldo Mirador Law Office Unit 1807 Cityland Condominium 10-Tower 1, 6815 Ayala Avenue cor. H.V., Dela Costa St., Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your application for relief from double taxation dated January 20, 2003, on behalf of your client, JAE Philippines Inc., requesting confirmation of your opinion that the cash dividend paid to Japan Aviation Electronics Industry, Ltd (JAE-Japan) by JAE Philippines Inc. (JAE-Phil) is subject to the preferential tax rate of 10% pursuant to the RP-Japan tax treaty. It is represented that JAE-Japan is a corporation organized and existing under the laws of Japan with business address at 21-6 Dogengsaka 1-Chome, Shibuya-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification date December 27, 2002 issued by the Securities and Exchange Commission; that JAE-Phil is a corporation organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) with principal address at Gateway Business Park, Javalera, General Trias, Cavite; that since 2001 up to the present, JAE-Japan holds 13,995 shares representing 99.96% of the outstanding capital stocks of JAE-Phil; that in a Special Meeting of the Board of Directors of JAE-Phil held on September 25, 2002, the Board of Directors authorized the declaration of a cash dividend of P114.30 per share in the total amount of Sixteen Million Two Thousand Pesos (P16,002,900) to its stockholders of record as of September 15, 2002 payable on or before March 31, 2003. In reply, please be informed that Article 10 of the RP-Japan tax treaty provides: "Article 10 "Dividends "1. Dividend 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. "3. . . . "4. The term 'dividends' as used in the 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 aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10% if the latter is the beneficial owner thereof which holds directly at least 25% either of the voting shares or of the total shares of the issuing company during the period of six months immediately preceding the date of payment of the dividends. In all other cases, the tax rate to be imposed shall be 25% of the gross amount of the dividends. (BIR Ruling No. DA-ITAD-67-03 dated May 5, 2003) In view thereof, since JAE-Japan holds 99.96% of the outstanding capital stocks of JAE-Phil during the period of six months immediately preceding the date of payment of the dividend, this Office is of the opinion and so holds that the dividend payment by JAE-Phil to JAE-Japan is subject to the preferential tax rate of 10% pursuant to the RP-Japan tax treaty. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service