Request for Review of BIR Ruling No. ITAD-253-13 Issued on 22 August 2013

May 7, 2014 DOF OPINION 1st Indorsement Respectfully referred to Hon. Kim S. Jacinto-Henares, the Commissioner of the Bureau of Internal Revenue (BIR), for appropriate action, the attached case docket of the Request for Review of BIR Ruling No. ITAD-253-13 (Request) filed with this Department on 11 October 2013, by Transnational Diversified Corporation (TNC) on behalf of Nippon Yusen Kabushiki Kaisha (NYK). The Request seeks the review of BIR Ruling No. ITAD-253-13 issued on 22 August 2013, which partially denied NYK's Tax Treaty Relief Application (TTRA) filed with the BIR-International Tax Affairs Division (BIR-ITAD) on 22 June 2011. NYK's TTRA sought confirmation from the BIR-ITAD that a preferential tax rate of ten percent (10%) is applicable to the dividends received by NYK from three (3) domestic corporations. As basis for the use of the preferential tax rate, the TTRA cites the Convention between Japan and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income , signed on 13 February 1980 and amended by the Protocol which took effect on 1 January 2009 (RP-Japan Tax Treaty). While NYK's TTRA was partially granted as to the application of the preferential 10% tax rate on dividends paid after the filing of the TTRA on 22 June 2011, BIR Ruling No. ITAD-253-13 denied the application of the same preferential rate for all the taxes on the dividends paid by the domestic corporations to NYK on and prior to 22 June 2011. As basis for the partial denial, the BIR-ITAD cites Revenue Memorandum Order (RMO) No. 72-2010, which requires that the filing of the TTRA "should always be made before the transaction." Under RMO No. 72-2010, for purposes of filing the TTRA, "transaction" shall mean "before the occurrence of the first taxable event." Further, the same RMO states that failure to properly file the TTRA with the BIR-ITAD within the period prescribed "shall have the effect of disqualifying the TTRA under this RMO." DICcTa BIR Ruling No. ITAD-253-13 emphasized that since RMO No. 72-2010 expressly requires that TTRAs must be filed prior to the taxable transactions, specifically the payment of the dividends to NYK, then the RP-Japan Tax Treaty relief sought may not be granted as to the said dividends payments made prior to the filing of NYK's TTRA, that is, those paid on or before 22 June 2011. In connection therewith, we take note of the ruling of the Supreme Court in the case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue , G.R. No. 188550 dated 19 August 2013, which has already attained finality. Said case dealt with the validity of the requirement under RMO No. 1-2000 that any availment of a tax treaty relief must be preceded by an application with BIR-ITAD at least fifteen (15) days before the transaction. In ruling that the RMO must not be strictly construed as to deprive persons of the benefit of a tax treaty, the Supreme Court held that in conformity with the generally accepted principle in international law of pacta sunt servanda , ". . . laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. " The Supreme Court further stated that, "Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. . . . At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief." In view of the said Decision and Resolution of the Supreme Court, we respectfully refer the Request for Review of BIR Ruling No. ITAD-253-13 filed by TNC on behalf of NYK to your Office, for appropriate action. Thank you for your attention. (SGD.) CARLO A. CARAG Undersecretary Revenue Operations and Legal Affairs Group