ITAD Ruling No. 208-02

November 26, 2002 ITAD RULING NO. 208-02 Art. 10, RP-Japan BIR Ruling No. DA-ITAD-6-00 BIR Ruling No. DA-ITAD-57-02 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. Alexander Cabrera Partner, Tax Services Gentlemen : This refers to your letter dated March 8, 2002, on behalf of your client Davao Central Chemicals Corporation (DCCC), requesting confirmation that its dividend payments to Mitsubishi Corporation (Mitsubishi-Japan) and Takeda Chemical Industries (Takeda) are subject to the 10% preferential tax rate pursuant to the RP-Japan tax treaty. It is represented that Takeda is a corporation organized and existing under the laws of Japan with principal address at 1-1, Docomachi 4-chome, chou-ku, Osaka, Japan; that Takeda is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated March 21, 2002 issued by the Securities and Exchange Commission; that Mitsubishi-Japan is a corporation organized and existing under the laws of Japan with principal address at 6-3 Marunouchi, 2-chome, Chiyoda ku, Tokyo 100-8086, Japan; that Mitsubishi-Japan has an existing branch in the Philippines which is Mitsubishi Corporation; and that the investment was made directly by Mitsubishi-Japan and not through its Philippine Branch Mitsubishi Corporation; that DCCC is a corporation organized and existing under the laws of the Philippines with principal address at Km. 19 Tibungko, Davao City, and is registered with the Board of Investment per Certification of Registration No. 72-104; that Takeda and Mitsubishi-Japan are major stockholders of DCCC; that the Board of Directors of DCCC, at a Special Meeting held on March 21, 2002 declared cash dividends in the amount of P13,230,000.00 out of the retained earnings of DCCC as of December 31, 2001, in favor of the stockholders of record as of December 31, 2001, payable not later than March 31, 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 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) ". . . " "(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 Investments 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 (emphasis supplied) "(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 resident company of the Philippines registered with the BOI and engaged in preferred areas of investment under the investment incentives laws of the Philippines to a resident of Japan who is the beneficial owner of the dividends at a rate not exceeding 10 percent of the gross amount of the dividends. Considering that DCCC is a resident company 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, and considering further that Mitsubishi-Japan directly invested with DCCC and not through its Philippine Branch, the dividend payments of DCCC to Takeda and Mitsubishi-Japan shall be subject to the preferential tax treaty rate of ten percent (10%) to be withheld from the gross amount of dividend payments pursuant to Article 10 of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD 6-00 dated January 19, 2000 and BIR Ruling No. DA-ITAD-57-02 dated April 24, 2002 ) 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