September 8, 2015

ITAD BIR RULING NO. 254-15

Article 10, Philippines-Japan tax

treaty, as amended

Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City

Attention: Romulo S. Danao, Jr.

Partner, Tax Services

Gentlemen :

This refers to your tax treaty relief application filed on July 9, 2014
requesting confirmation that dividends paid by Rio Tuba Nickel Mining
Corporation ("Rio Tuba") to Pacific Metals Co., Ltd. ("Pacific Metals") are
subject to a preferential tax rate of 10 percent pursuant to the Convention between
the Republic of the Philippines and Japan for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended
by Protocol 1(1) ("Philippines-Japan tax treaty, as amended").

Facts

Pacific Metals is a corporation organized and existing under the laws of

Japan and is a resident thereof based on its Articles of Incorporation and
Certificate of Residency issued by the Kojimachi Tax Office in Japan on April 25,
2014. Based on the Certification of Corporate Filing/Information issued by the
Securities and Exchange Commission on April 21, 2014, Pacific Metals has a
permanent establishment in the Philippines in the nature of a representative office
which license to operate was approved on October 23, 1970. To date, no petition
for the withdrawal or cancellation of license have been filed by the corporation.
On the other hand, Rio Tuba is a domestic corporation organized and existing
under Philippine laws.

Based on Secretary's Certificate issued on June 30, 2014, the Board of

Directors of Rio Tuba, during a regular meeting on June 9, 2014, approved the
declaration of cash dividends amounting to P1,000,000,000.00 in favor of the
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 company's stockholders of record as of May 31, 2014, payable on July 15, 2014.
As of May 31, 2014, Pacific Metals holds 918,000,000 common shares of stock of
Rio Tuba, each share with a par value of P1.00, which constitute 36 percent
ownership in the total outstanding shares of stock of Rio Tuba. These shares were
acquired by Pacific Metals from 1975 through 2012 by way of purchase and stock
dividend. SDHTEC

Based on the Certification issued by Metropolitan Bank and Trust

Company, Rio Tuba remitted such dividend to Pacific Metals on July 15, 2014.

Based on a certification issued by the representative office of Pacific Metals

("Pacific Metals — Representative Office") on July 1, 2014, Pacific Metals —
Representative Office has no participation whatsoever, directly or indirectly, in the
investments of Pacific Metals in Rio Tuba, and that the dividend income received
by Pacific Metals from the said investments is neither attributable to nor
effectively connected with Pacific Metals — Representative Office and any
payment of dividends is directly remitted to Pacific Metals.

Finally, the dividends subject of the request are not under investigation,
on-going audit, administrative protest, claim for refund or issuance of a tax credit
certificate, collection proceedings, or judicial appeal, based on the Sworn
Statement issued by the Vice-President for Finance and Administration of Rio
Tuba on June 26, 2014.

Ruling

In reply, please be informed that under Section 28 (B) (1) of the National
Internal Revenue Code of 1997 ("Tax Code"), as amended, income derived by a
foreign corporation not engaged in trade or business is subject to income tax at the
rate of 30 percent, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

xxx xxx xxx

(B) Tax on Nonresident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this

Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or

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 determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains
subject to tax under subparagraph 5(c) and (d) above:
*(2) Provided, That effective January 1, 2009, the rate
of income tax shall be thirty percent (30%)."

However, under Section 32 (B) (5) of the Tax Code, such income is exempt
or partially exempt to the extent required by any treaty obligation on the
Philippines, to wit:

"SEC. 32. Gross Income. —

xxx xxx xxx

(B) Exclusions from Gross Income. — The following

items shall not be included in gross income and shall
be exempt from taxation under this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. — Income of any kind,

to the extent required by any treaty obligation binding
upon the Government of the Philippines."

In this particular case, you invoke the Philippines-Japan tax treaty, as

amended where paragraphs 1, 2 and 5, Article 10 thereof provide:

"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 10 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) 15 per cent of the gross amount of the dividends in all

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 other cases.

xxx xxx xxx

5. The provisions of paragraphs 1, 2 and 3 shall not apply if the

beneficial owner of the dividends, being a resident of a
Contracting State, carries on business in the other Contracting
State of which the company paying the dividends is a
resident, through a permanent establishment situated therein,
or performs in that other Contracting State independent
personal services from a fixed base situated therein, and the
holding in respect of which the dividends are paid is
effectively connected with such permanent establishment or
fixed base. In such case the provisions of Article 7 or Article
14, as the case may be, shall apply."

Under this article, dividends arising in the Philippines and paid to a resident
of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent if
the company recipient of the dividends holds directly at least 10 percent of the
voting shares or the total shares of the company paying the dividends for a period
of six months immediately preceding the date of payment of dividends, and (b) 15
percent in all other cases (paragraphs 1 and 2). However, the preferential rates do
not apply if the recipient carries on business in the Philippines through a
permanent establishment situated therein and the holding in respect of which the
dividends are paid is effectively connected with such permanent establishment
(paragraph 5).

On the question of dividends effectively connected with a permanent

establishment, the following commentaries of the Organisation for Economic
Co-operation and Development Model Tax Convention on Income and on Capital
(Condensed Version, July 22, 2010 p. 193) mention that this is the case if the
dividends are paid in respect of holdings forming part of the assets of the
permanent establishment or otherwise effectively connected with that
establishment, thus: AScHCD

"31. Certain States consider that dividends, interest and royalties

arising from sources in their territory and payable to
individuals or legal persons who are residents of other States
fall outside the scope of the arrangement made to prevent
them from being taxed both in the State of beneficiary's
residence when the beneficiary has a permanent
establishment in the former State. Paragraph 4 is not based
on such a conception which is sometimes referred to as 'the
force of attraction of the permanent establishment'. It does
not stipulate that dividends flowing to a resident of a

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 Contracting State from a source situated in the other State
must, by a kind of legal presumption, or fiction even, be
related to a permanent establishment which that resident may
have in the latter State, so that the said State would not be
obliged to limit its taxation in such a case. The paragraph
merely provides that in the State of source the dividends are
taxable as part of the profits of the permanent establishment
there owned by the beneficiary which is a resident of the
other State, if they are paid in respect of holdings forming
part of the assets of the permanent establishment or otherwise
effectively connected with that establishment . . ."
(Underscoring supplied)

Similarly, in Shimizu Corporation vs. Commissioner of Internal Revenue

and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), the
Supreme Court ruled that dividends derived by a foreign corporation which has a
branch office in the Philippines are effectively connected with the branch office
only if the business activities that give rise to the dividends are conducted through
the branch office, following the principal-agent relationship theory, thus:

"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 the branch or the
resident foreign corporation. Corollarily, if the business transaction is
conducted through the branch office, the latter becomes the taxpayer, and
not the foreign corporation." (Underscoring supplied)

Accordingly, since Pacific Metals — Representative Office's business

functions in the Philippines do not include the putting up of investments in Rio
Tuba's shares of stock and receiving dividends from the latter but to promote
exports of Philippine products, particularly minerals and other base metals to
Japan and other countries and to provide export assistance to Philippine producers
in the form of marketing, research, etc.; additionally, such investment in Rio
Tuba's was made directly by Pacific Metals and independently of Pacific Metals
— Representative Office and this permanent establishment has no knowledge or
effective participation in the investment, the holding of such shares in Rio Tuba's
is not effectively connected with Pacific Metals — Representative Office as
contemplated in paragraph 5, Article 10 of the Philippines-Japan tax treaty, as
amended.

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 Moreover, since Pacific Metals holds directly 36 percent of the voting
(common) shares and total shares of Rio Tuba since 2012, which is above the
minimum 10 percent shareholding and more than the minimum six month holding
period, such dividend paid by Rio Tuba to Pacific Metals is subject to income tax
at the rate of 10 percent pursuant to paragraph 2 (a), Article 10 of the
Philippines-Japan tax treaty, as amended.

This ruling is issued on the basis of the facts as represented. However, if

upon investigation, it shall be disclosed that the actual facts are different, then this
ruling shall be without force and effect insofar as the herein parties are concerned.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue
Footnotes
1. Protocol Amending the Convention between the Republic of the Philippines and
Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income effective January 1, 2009.

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 Endnotes

1 (Popup - Popup)
1. Protocol Amending the Convention between the Republic of the Philippines and
Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income effective January 1, 2009.

2 (Popup - Popup)
* Note from the Publisher: The phrase "and (d) above" no longer appears in RA
9337, the law amending this provision.

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