ITAD Ruling No. 143-05

November 23, 2005 ITAD RULING NO. 143-05 Article 10, Phils-Singapore Tax Treaty Article 10, Phils-Japan Tax Treaty BIR Ruling No. DA-ITAD-119-04; BIR Ruling No. DA-ITAD-123-04; BIR Ruling No. DA-ITAD-130-04 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Partner, Tax Services Gentlemen : This refers to your letter dated December 28, 2004, on behalf of your client, Daiho (Phils), Inc. (Daiho-Phil), requesting confirmation of your opinion that: (1) dividends paid to Asia Daiho Pte., Ltd. (Asia-Daiho), formerly Daiho Industrial(s) Pte. Ltd; (which was formerly Tylon (Singapore) Pte. Ltd.), are subject to the withholding tax rate of 15% pursuant to the Philippines-Singapore tax treaty; (2) dividends paid to Mitsui & Co., Ltd. (Mitsui) are subject to the withholding tax rate of 25% pursuant to the Philippines-Japan tax treaty; and (3) dividends paid to Daiho Industrial Co., Ltd. (Daiho-Industrial) are subject to the 10% withholding tax rate pursuant to the Philippines-Japan tax treaty. It is represented that Asia-Daiho is a corporation duly organized and existing under the laws of Singapore with principal office at No. 14 Woodsland Loop, Woodsland East Industrial Estate, Singapore; that it is not registered either as corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 14, 2004; that Mitsui is a corporation duly organized and existing under the laws of Japan with principal address at 2-1, Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, Japan; that it is licensed to engage in business in the Philippines on March 17, 1967 and that to date no withdrawal or cancellation of license appears to have been filed by the corporation as certified by the Securities and Exchange Commission on October 11, 2005; that Mitsui's branch in the Philippines is licensed (1) to export, import, and engage in the domestic sale of various commodities, (2) to carry on an agency business, and (3) manufacture all types of machines; that said branch, however, does not have any participation whatsoever in the holding of Mitsui's shares of stocks in Daiho-Phil, and therefore any income derived by Mitsui independently of its Philippine branch shall be considered income of Mitsui alone; that Daiho Industrial is a corporation duly organized and existing under the laws of Japan with principal address at 1-3-7 Dainichi-cho, Moriguchi City Osaka, Japan; that it is not registered either as corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 14, 2004; that Daiho-Phil is a corporation duly organized and existing under the laws of the Philippines with principal address at 102 North Science Avenue, Special Economic Zone, Laguna Technopark, Bian Laguna; that Asia-Daiho and Mitsui owned 90% and 10% respectively, of Daiho-Phil's shares; that on February 26, 2004, Daiho-Phil's Board of Directors declared cash dividends to its stockholders, Asia-Daiho and Mitsui amounting to Two Hundred Thirty Two Million Five Hundred Thirty Six Thousand Five Hundred Fifty Three Pesos (P232,536,553.00) and Twenty Five Million Eight Hundred Thirty Seven Thousand Three Hundred Ninety Five Pesos (P25,837,395.00) respectively; that the cash dividends were paid on March 31, 2004; that thereafter, Asia-Daiho and Mitsui relinquished all their shares in favor of Daiho-Industrial, making Daiho-Phil a wholly owned subsidiary of Daiho-Industrial; that on October 4, 2004, the Board of Directors of Daiho-Phil approved the declaration of cash dividends in the amount of P21.00 for each common stock for fiscal year ending 2004; and that the cash dividends were paid on October 29, 2004. ADcEST In reply, please be informed that dividends received by Asia-Daiho, Mitsui and Daiho-Industrial are subject to Philippine tax as follows: 1. Asia-Daiho Article 10 of the Philippines-Singapore tax treaty provides: "Article 10 "Dividends "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 State. "2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. "4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident." "xxx xxx xxx" Based on the aforequoted provisions, the 15% preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which fifteen percent (15%) shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since Asia-Daiho, before transferring to Daiho-Industrial its shares of stock to Daiho-Phil, held 90 percent of the total common shares of Daiho-Phil during the part of the latter's taxable year immediately preceding the date of payment of the dividends, (i.e. March 31, 2004), and during the whole of its prior taxable year, dividends received by Asia-Daiho shall be subject to the preferential tax rate of 15% pursuant to Article 10(2)(a) of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-119-04 dated October 27, 2004) HaIESC 2. Mitsui and Daiho-Industrial Article 10 of the Philippines-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. 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 aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident in Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that as of March 31, 2004, Mitsui holds only 10% of the shares of stocks of Daiho-Phil, as shown in the Certification issued by the Corporate Secretary of Daiho-Phil dated October 5, 2004, the dividends paid to Mitsui by Daiho-Phil are subject to the 25% preferential tax rate pursuant to Article 10(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-123-04 dated November 3, 2004) In the instant case, it is represented that while Mitsui was licensed to engage in business in the Philippines, said Philippine office is not privy and does not have any participation whatsoever in the holding of Mitsui's shares of stocks in Daiho-Phil. Such being the case, any income derived by Mitsui independently of its Philippine office shall be considered income of Mitsui alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: CEcaTH "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside . The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (italics ours) Considering that Daiho-Industrial holds 100% of Daiho-Phil's shares of stock for the period of six (6) months immediately preceding the date of payment of the dividends, per Certification issued by the Corporate Secretary of Daiho-Phil dated October 4, 2004, this Office is of the opinion and hereby holds that the dividend payments of Daiho-Phil to Daiho-Industrial are subject to the 10% preferential tax rate pursuant to the aforequoted Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-130-04 dated November 10, 2004) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service