BIR Ruling No. 279-15

August 25, 2015 BIR RULING NO. 279-15 Sec. 28 (A) (7) (b), 1997 NIRC, as amended; 000-00 Buag & Associates Law Office Suites A & B, 10th Floor, Strata 100 Building F. Ortigas, Jr. Road (formerly Emerald Avenue) Ortigas Center, Pasig City Attention: Atty. Jose Mario C. Buag Gentlemen : This refers to your letter dated July 24, 2010, requesting confirmation of your opinion that the interest income derived by Artnature, Inc. (hereinafter called Artnature) from its Japanese Yen and United States Dollar deposit accounts at Mizuho Corporate Bank, Ltd., Manila Branch is exempt from income tax and withholding tax pursuant to Sec. 28 (A) (7) (b) of the National Internal Revenue Code (NIRC), as amended. It is represented that Artnature is a foreign corporation, organized and existing under the laws of Japan with office address at 40-7, Yoyogi 3-chome, Shibuya-ku, Tokyo, Japan. It is engaged in the manufacture and sale of hair products, providing guidance on hair fostering, beauty culture and hairdressing business, and in the manufacture, sale, export and import of cosmetic and pharmaceutical items and medical appliances. Under its License to Transact Business in the Philippines issued by the Securities and Exchange Commission (SEC) on October 10, 2006, Artnature is duly licensed under Company Registration No. FS200615974 to establish a representative office in the Philippines to engage in activities such as but not limited to information gathering, information dissemination, assistance to its subsidiaries in the Philippines and promotion of the company's products. The representative office is not allowed to derive any income from sources within the Philippines. Pursuant to its License, Artnature established its representative office in the Philippines (hereinafter Artnature RO and with TIN 221-182-357-000) located at Km. 32, Barangay Nueva, National Highway, San Pedro, Laguna. The said representative office did not derive any income from operations in the Philippines and its operating expenses are fully subsidized by Artnature as evidenced by its Audited Financial Statements for fiscal year ending December 31, 2007. Artnature whose registered address is 40-7, Yoyogi 3-chome, Shibuya-ku, Tokyo, Japan maintains United States Dollar and Japanese Yen deposit accounts at Mizuho Corporate Bank, Ltd. Manila Branch, as shown by the Certificate of Deposit Existence (CER-000082-08) issued by the bank on May 19, 2008, to wit: Account Type Account No. Opening Date United States Dollar Savings Account F15-789-153266 May 31, 2006 Japanese Yen Savings Account F15-789-153274 May 31, 2006 Mizuho Corporate Bank, Ltd. Manila is the Philippine Branch of Mizuho Corporate Bank, Ltd., a foreign banking corporation organized and existing under the laws of Japan which is registered to do business in the Philippines under Amended SEC License No. AFO95-069 and with principal office address at 26/F Citibank Tower, Valero St., corner Villar St., Salcedo Village, Makati City. A notarized certification was issued by the Chief Representative of Artnature RO, Mr. Hiroshi Kazama, on March 31, 2010, that the interest income derived by the head office of Artnature in Japan from its deposit accounts at Mizuho Bank Philippine Branch is not effectively connected with Artnature RO and that said deposit accounts and the accruing interest thereon do not form part of the assets of Artnature RO. In reply thereto, please be informed that Section 22 of the tax code defines resident foreign corporation and non-resident foreign corporation as follows: "SEC. 22. Definitions . When used in this Title: xxx xxx xxx (H) The term " resident foreign corporation " applies to a foreign corporation engaged in trade or business within the Philippines. (I) The term " nonresident foreign corporation " applies to a foreign corporation not engaged in trade or business within the Philippines." In relation thereto, Section 28 (A) (7) (b) of the Tax Code provides that interest income derived under the expanded foreign currency deposit system shall be subject to a final tax rate of ten percent (10%). However, any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations. xxx xxx xxx (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. HEITAD xxx xxx xxx (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%). Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax." Under Section 123 of the Corporation Code of the Philippines, "a foreign corporation is done, formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency". And for taxation purposes, a foreign corporation may be either a resident or nonresident, the former referring to a foreign corporation engaged in trade or business within the Philippines, and the latter, to a foreign corporation not engaged in trade or business in the Philippines and not having any office or place of business therein. (Mirant (Phil) Energy Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6561, June 17, 2005) In the case at hand, while Artnature is a foreign corporation organized and existing under the laws of Japan, it is engaged in business in the Philippines through its representative office; hence, Artnature is undeniably a "resident foreign corporation" as defined in this jurisdiction. Consistent herewith that Artnature is considered "resident foreign corporation" is the ITAD BIR Ruling No. 014-10 dated July 1, 2010 which states that Artnature has a permanent establishment in the Philippines pursuant to RP-Japan Tax Treaty, to wit: "Artnature has a permanent establishment in the Philippines. Since a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes, in particular, an office, it follows that Artnature Representative Office, being an office of Artnature and situated currently at Kilometer 32, Barangay Nueva, National Highway, San Pedro, Laguna, Philippines, constitutes a permanent establishment of Artnature." However, while Artnature head office and representative office constitute one corporate entity and is considered as resident foreign corporation, Artnature head office transacting business in the Philippines independently from its representative office is not considered the same juridical entity as its representative office in the Philippines. Income earned by the head office independently of its representative office shall be considered as income of the nonresident foreign corporation. The Supreme Court in Marubeni Corporation vs. Commissioner of Internal Revenue, G.R. No. 76573, September 14, 1989 , ruled as follows: "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 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." Considering that Artnature representative office had no participation whatsoever in the transaction with Mizuho Corporate Bank, Ltd., Manila Branch; interest income derived therefrom are considered separate and distinct income of Artnature head office in Tokyo, Japan. Accordingly, interest income derived by Artnature head office (a non-resident Japanese corporation) from its Japanese Yen and United States Dollar deposit accounts at Mizuho Corporate Bank, Ltd., Manila Branch, independently of its Philippine representative office, shall be considered as income of the said non-resident Japanese corporation alone. As such, said interest income shall be exempt from Philippine income tax and consequently, withholding tax pursuant to Section 28 (A) (7) (b) of the 1997 Tax Code. ATICcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue