ITAD Ruling No. 137-02

August 6, 2002 ITAD RULING NO. 137-02 RP-Japan Tax Treaty, Article 10 BIR Ruling No. DA-ITAD-80-02 Philippine-Japan Active Carbon Corporation 5th Floor Don Pablo Bldg., Amorsolo St. Legaspi Village, Makati City Attention: Mr. Uichiro Kawamura EVP & General Manager Gentlemen : This refers to your letter dated April 4, 2002 requesting to avail of the ten per cent (10%) preferential tax rate on the dividend payments of Philippine-Japan Active Carbon Corporation (PJACC) to Kowa Company Ltd. (KOWA) pursuant to Article 10 of the RP-Japan tax treaty. It is represented that KOWA is a corporation organized and existing under the laws of Japan with principal address at 6-29, Nishiki 3-chome, Naka-ku, Nagoya, Japan; that per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated March 22, 2002, KOWA was originally licensed to engage in business in the Philippines as a branch on June 2, 1967 under License No. 509; that the said license was canceled and the same has been converted into a representative office license to enable said entity to transact business in the Philippines on August 23, 1984 for the purpose of undertaking the following activities: 1) to introduce and promote the products of the KOWA Group of companies; 2) to investigate, study and recommend Philippine products for export to its head and affiliate offices; 3) to assist KOWA branches all over the world in their import requirements of Philippine products, such as garments, bags, shoes, handicrafts, foodstuffs, etc.; and 4) to oversee, supervise and monitor the investments of its head office in local companies; that PJACC is a domestic corporation registered with the Board of Investments evidenced by Certificate of Registration Nos. 71-60, EP89-1441 & EP 93-329 with principal address at Malagamot, Panacan, Davao City; that KOWA holds five hundred thirty five thousand nine hundred fifty (535,950) shares equivalent to Fifty Three Million Five Hundred Ninety Five Thousand Pesos (P53,595,000.00) representing forty nine and 95/100 (49.95%) per cent of the capital stock of PJACC; that on December 20, 2001, the Board of Directors of PJACC passed and approved the declaration of P5.00/share to the cash stockholders on record as of December 31, 2001 and payable on or before March 30, 2002. 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 by 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 other cases. "xxx xxx xxx "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 abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10 per cent if the latter holds directly at least 25 percent either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. (BIR Ruling No. DA-ITAD 80-02 dated May 2, 2002) Such being the case, and since KOWA holds forty nine and 95/100 (49.95%) per cent of the capital stock of PJACC during the period of six months immediately preceding the date of payment of the dividends, the dividends to be paid and remitted by PJACC to KOWA are subject to the ten per cent (10%) preferential tax rate pursuant to Article 10(a) of the RP-Japan tax treaty. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service