ITAD Ruling No. 137-00

September 19, 2000 ITAD RULING NO. 137-00 RP-Japan Article 10 ITAD 8-99 SHI Designing and Manufacturing , Inc . 4th & 5th Floors, FEMS Tower One 1289 Zobel Roxas Avenue, Manila Attention: Masao Yokoo President & CEO Gentlemen : This refers to your letter dated July 20, 2000 (Ref. No. L-2000-0603) requesting for tax treaty relief with regard to a cash dividend declared by SHI Designing & Manufacturing, Inc . ( SDMI ) in favor of Sumitomo Heavy Industries, LTd . ( SHI ) pursuant to Article 10(2) and (3) of the RP-Japan Tax Treaty. It is represented that SHI is a corporation formed and organized under the laws of Japan with head office address at 9-11, Kitashinagawa 5-Chome, Shinagawa-ku, Tokyo 141, Japan; that SHI has no branch or permanent establishment in the Philippines as evidenced by the Certificate of Non-Registration of Corporation issued by the Securities and Exchange Commission on July 12, 2000; that SHI holds 99.99% of the total shares issued by SDMI; that SDMI is a domestic corporation formed and organized under the laws of the Philippines with office address at 4th Floor, FEMS Tower One, 1289 Zobel Roxas Avenue, corner South Superhighway, Manila; that SDMI is a BOI-registered enterprise on a preferred pioneer status per certification dated February 2, 1990 issued by the Board of Investment; and that on May 12, 2000 SDMI declared a cash dividend for the year ending December 31, 1999. 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 the 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) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investment and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends." "(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 In view of the foregoing, the preferential rate to be withheld by SDMI on its dividend remittances to SHI is ten per cent (10%) considering that SHI holds ninety nine and 99/100 per cent (99.99%) of the total shares of SDMI, outstanding and entitled to vote, and that SDMI is a BOI-registered engaged in preferred pioneer areas of investment. This ruling is being 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. THAECc Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner (Legal and Inspection Group)