BIR Ruling [DA-446-05]

October 27, 2005 BIR RULING [DA-446-05] Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco G. Tagao Head, Tax and Corporate Services and Atty. Joseph Shelner N. Songco Assistant Manager, Tax and Corporate Services Gentlemen : This refers to your letter dated October 20, 2005 stating that your client, Global Brands Company, Inc .(" GBCI "),is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 35F Penthouse Raffles Corporate Center, Emerald Avenue, Ortigas Center, Pasig City; that PPMV Nominees Limited (PPMV) is a company duly organized and existing under the laws of the United Kingdom and is a majority stockholder of GBCI; that on October 2, 2000, GBCI entered into a loan agreement with PPMV whereby PPMV extended a loan to GBCI; that the aggregate amount of the loan is Php402,395,000.00 broken down in three tranches, as follows: Value of Loan Notes Interest Rate Commencement Date Php 325,000,000.00 10% per annum 2 October 2000 Php 41,340,000.00 10% per annum 20 July 2001 Php 36,055,000.00 10% per annum 3 September 2001 Php 402,395,000.00 that for the period covering April 1, 2004 to September 30, 2005, GBCI failed to report in its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) duly filed with the BIR the withholding taxes on the interest on the loan from PPMV; that the details are as follows: INTEREST ON FOREIGN BASIC MONTHS LOAN W/HOLDING TAX Apr-04 2,638,655.74 PHP 395,798.36 May-04 2,726,610.93 408,991.64 Jun-04 2,638,655.74 395,798.36 Jul-04 2,726,610.93 408,991.64 Aug-04 2,726,610.93 408,991.64 Sep-04 2,638,655.74 395,798.36 Oct-04 2,726,610.93 408,991.64 Nov-04 2,638,655.74 395,798.36 Dec-04 2,726,610.93 408,991.64 Jan-05 2,734,081.10 410,112.16 Feb-05 2,469,492.60 370,423.89 Mar-05 2,734,081.10 410,112.16 PHP PHP 32,125,332.39 4,818,799.86 PHP PHP Apr-05 2,645,884.93 396,882.74 May-05 2,734,081.10 410,112.16 Jun-05 2,645,884.93 396,882.74 Jul-05 2,734,081.10 410,112.16 Aug-05 2,734,081.10 410,112.16 Sep-05 2,645,884.93 396,882.74 PHP PHP 16,139,898.08 2,420,984.71 that GBCI duly filed on time its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) for its other income payment subject to final withholding tax for the period covering April 1, 2004 to September 30, 2005 but failed to report the final withholding taxes on its interest on foreign loan because the interest due was never remitted; that the following is a summary of its compliance on the filing of its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) for the period covering April 1, 2004 to September 30, 2005: DATE OF Actual Date MONTHS FILING of Filing Apr-04 10-May-04 11-May-04 May-04 10-Jun-04 10-Jun-04 Jun-04 10-Jul-04 13-Jul-04 Jul-04 10-Aug-04 11-Aug-04 Aug-04 10-Sep-04 10-Sep-04 Sep-04 10-Oct-04 11-Oct-04 Oct-04 10-Nov-04 10-Nov-04 Nov-04 10-Dec-04 10-Dec-04 Dec-04 10-Jan-05 10-Jan-05 Jan-05 10-Feb-05 10-Feb-05 Feb-05 10-Mar-05 10-Mar-05 Mar-05 10-Apr-05 10-Apr-05 Apr-05 10-May-05 10-May-05 May-05 10-Jun-05 10-Jun-05 Jun-05 10-Jul-05 11-Jul-05 Jul-05 10-Aug-05 10-Aug-05 Aug-05 10-Sep-05 12-Sep-05 Sep-05 10-Oct-05 10-Oct-05 that GBCI, without notice from the BIR, intends to file voluntarily the necessary amended monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) to include the deficiency basic final withholding tax due on the interest on foreign loan and classified as WC 180 under the ATC Code plus the corresponding penalty in the form of interest at the rate of 20% per annum; that the following is a summary of the proposed deficiency final withholding tax calculation and the interest computation: INTEREST ON BASIC MONTHS FOREIGN LOAN W/HOLDING TAX 20% INTEREST PHP PHP PHP Apr-04 2,638,655.74 395,798.36 116,896.06 May-04 2,726,610.93 408,991.64 113,845.34 Jun-04 2,638,655.74 395,798.36 103,666.64 Jul-04 2,726,610.93 408,991.64 100,174.94 Aug-04 2,726,610.93 408,991.64 93,227.68 Sep-04 2,638,655.74 395,798.36 83,714.06 Oct-04 2,726,610.93 408,991.64 79,557.28 Nov-04 2,638,655.74 395,798.36 70,484.64 Dec-04 2,726,610.93 408,991.64 65,886.87 Jan-05 2,734,081.10 410,112.16 59,101.10 Feb-05 2,469,492.60 370,423.89 47,698.42 Mar-05 2,734,081.10 410,112.16 45,842.67 PHP PHP PHP 32,125,332.39 4,818,799.86 980,095.71 Apr-05 2,645,884.93 396,882.74 37,839.78 May-05 2,734,081.10 410,112.16 32,134.82 Jun-05 2,645,884.93 396,882.74 24,574.11 Jul-05 2,734,081.10 410,112.16 18,426.96 Aug-05 2,734,081.10 410,112.16 11,460.67 Sep-05 2,645,884.93 396,882.74 4,566.87 PHP PHP 16,139,898.08 PHP 2,420,984.71 129,003.20 PHP TOTAL 48,265,230.47 PHP 7,239,784.57 1,109,098.91 that the basic withholding tax was computed based on the 15% final withholding tax rate pursuant to Article 10 (2) of the Tax Treaty between the Philippines and the UK; and that the term interest under paragraph (5), Article 10 of the Tax Treaty defines interest as "income from . . . other debt claims of every kind . . . ."; that the interest is computed up to October 31, 2005; and that in support of your request, you have submitted the following documents: 1. Loan Agreement between GBCI and PPMV; 2. Duly filed monthly remittance returns of final income taxes withheld (BIR Form No. 1601-F) for the period covering 01 April 2004 to 30 September 2005 on other income payment subject to final withholding tax; and 3. Amended monthly remittance returns of final income taxes withheld (BIR Form No. 1601-F) for the period covering 01 April 2004 to 30 September 2005 on interest on foreign loan. Based on the foregoing representations, you now request for confirmation of your opinion that GBCI is not subject to the 25% surcharge for the late payment of its final withholding taxes on interest on foreign loans for the period covering April 1, 2004 to September 30, 2005 but will only be required to pay the deficiency basic tax plus the corresponding penalty in the form of interest at the rate of 20% per annum in view of the fact that it was able to file on time its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) for its other income payment subject to final withholding tax for the period covering April 1, 2004 to September 30, 2005. In reply thereto, please be informed that pursuant to Sections 248 and 249 of the Tax Code of 1997, as implemented by Revenue Memorandum Circular (RMC) No. 46-99, the 25% surcharge is imposed in addition to the tax required to be paid as penalty only in the following cases: (1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; (2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessments; or (4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of the tax due for which no return is required to be filed, on or before the dated prescribed for its payment. It is clear from the above-cited provision that the 25% surcharge shall be imposed in case of failure to file any return and pay the tax due thereon on the date prescribed for its payment Inasmuch as GBCI has duly filed on time, on the date prescribed for filing and payment its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) for its other income payment subject to final withholding tax for the period covering April 1, 2004 to September 30, 2005, the foregoing 25% surcharge shall not be imposed in the course of its voluntary filing of the amended monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) on interest on foreign loan (ATC WC 180) and payment thereof without notice of assessment from the BIR. WHEREFORE, in view of the foregoing ,this Office hereby confirms your opinion that GBCI is not subject to the 25% surcharge for the late payment of its final withholding taxes on interest on foreign loans for the period covering April 1, 2004 to September 30, 2005 but will only be required to pay the deficiency basic tax plus the corresponding penalty in the form of interest at the rate of 20% per annum in view of the fact that it was able to file on time its monthly remittance return of final income taxes withheld (BIR Form No. 1601-F) for its other income payment subject to final withholding tax for the period covering April 1, 2004 to September 30, 2005. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue