Request for Review of BIR Ruling No. ITAD 284-11

January 23, 2012 DOF OPINION Cochingyan & Peralta Law Offices 12th Floor, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City 1227, Metro Manila Attention: Atty. Jose Cochingyan, III Managing Partner SUBJECT : Request for Review of BIR Ruling No. ITAD 284-11 Gentlemen : This is in reference to your request for review, on behalf of your client, Clariant International Ltd. ("CIL"), of Bureau of Internal Revenue ("BIR") Ruling No. ITAD 284-11 dated 18 November 2011, which held that the Tax Treaty Relief Application ("TTRA") filed by CIL on 28 December 2009 for application of the preferential tax rate of ten percent (10%) to dividends declared by Clariant Philippines Corporation ("CPC") was a violation of Section III (2) of Revenue Memorandum Order No. 1-2000 ("RMO 1-2000"), which prescribes that any availment of a tax treaty relief should be preceded by an application for tax treaty relief with the BIR's International Tax Affairs Division ("ITAD") at least fifteen (15) days before payment of the transaction, and, thus, the dividends paid by CPC on 18 December 2009 are subject to regular corporate income tax rate of thirty percent (30%) pursuant to Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC"), to wit: aHIEcS "In view of the foregoing, since the dividends received by Clariant International Ltd. were paid on December 18, 2009 , and the subject TTRA was only filed on December 28, 2009 in violation of Section III(2) of RMO 1-2000, this Office hereby DENIES the TTRA for having been filed beyond the 15-day period prescribed by the RMO. Accordingly, the subject dividends shall be subject to income tax at the rate of 30% as provided under Section 28 (B)(1) of the 1997 National Internal Revenue Code, as amended." As culled from the records, the facts are as follows: CIL is a corporation organized and existing under the laws of Switzerland. It is not registered as a corporation or partnership in the Philippines. On the other hand, CPC is a corporation existing under the laws of the Philippines. Based on the Secretary's Certificate dated 23 December 2009 ("Secretary's Certificate") issued by the Corporate Secretary of CPC, the Board of Directors of CPC declared cash dividends on 03 November 2009 in the amount of Five Million Eighty Four Thousand Eight Hundred Ninety Two Pesos and 21/100 (Php5,084,892.21) in favor of stockholders of record as of 18 December 2009, payable on or before 18 December 2009. Based on said Secretary's Certificate, as of 18 December 2009, CIL holds 161,993 common shares of stock out of the 161,998 total issued and outstanding common shares of stock of CPC, which is equivalent to 99.99% of the total and outstanding common shares of stock of CPC. aAHISE On 28 December 2009, CIL filed the TTRA dated 23 December 2009 with the BIR ITAD to request confirmation that the dividends paid by CPC to CIL on 18 December 2009 are subject to a preferential tax rate of ten percent (10%) pursuant to the Convention between the Republic of the Philippines and the Government of the Swiss Confederation for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("RP-Switzerland Tax Treaty"), effective 04 January 2002. CIL requested the review of BIR Ruling No. ITAD 284-11 before this Office, and alleged that the RP-Switzerland Tax Treaty does not require the filing of an application before the availment of the tax treaty relief and, thus, the provision under the RP-Switzerland Tax Treaty granting the right to a preferential tax rate of ten percent (10%) on the gross amount of dividends received by CIL cannot be taken away by a mere Revenue Memorandum Order. In addition, CIL asserts that its right to the preferential rate under the RP-Switzerland Tax Treaty has already been confirmed by the ITAD in BIR Ruling No. 002-09. Nevertheless, CIL is entitled to the application of the preferential tax rate under the RP-Switzerland Tax Treaty on the dividends received by CIL because it already substantially complied with the provisions of RMO 1-2000 by actually filing its TTRA on 28 December 2009. After a careful review of the case records, we see no reason to depart from the findings and conclusions of the BIR. We note that the RP-Switzerland Tax Treaty provides the following rules with respect to dividends: AHTICD "ARTICLE 10 DIVIDENDS 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 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 State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed: a) 10 percent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 percent of the capital of the paying company; EcSaHA b) 15 percent of the gross amount of the dividends in all other cases. xxx xxx xxx 3. 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 which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident." Based on the afore-quoted provisions of the RP-Switzerland Tax Treaty, dividends paid to a company which is a resident of Switzerland will be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of dividends if the recipient is a company which owns at least ten percent (10%) of the voting shares of the company paying the dividends, and at a rate not exceeding fifteen percent (15%), in all other cases. In order to implement the proper exercise of the grant of the afore-mentioned preferential tax rates under the RP-Switzerland Tax Treaty, the BIR issued RMO 1-2000 which prescribes the procedure to be followed in availing tax treaty reliefs. In the said RMO 1-2000, in cases of tax treaty relief availment from double taxation, the BIR adopted the policy and procedure of requiring the filing of a TTRA with the ITAD at least fifteen (15) days before the transaction, such as the payment of dividends, thus: cSEaDA "III. Policies : In order to achieve the above-mentioned objectives, the following policies shall be observed: 1. The processing for tax treaty relief shall be transferred from Law Division to the International Tax Affairs Division (ITAD) in accordance with the approved memorandum dated March 23, 1999. 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. Consequently, BIR Form Nos. TC 001 and TC 002 prescribed under RMO 10-92 are hereby declared obsolete. ICASEH xxx xxx xxx IV. Procedures : The following procedures are to be observed in the processing of the tax treaty relief application: 1. Taxpayer 1.1 Accomplish the new BIR Form 0901 Application for Relief from Double Taxation. aATHES 1.2 File BIR Form 0901 with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., with all the supporting documents justifying the relief sought. . . ." 1 Thus, in order to avail of any tax treaty relief under any Philippine tax treaty, the applicant must file a duly accomplished TTRA, using the prescribed BIR Form, at least fifteen (15) days prior to the occurrence of the transaction, which may be the payment of dividends, royalties, etc., and such TTRA must also be accompanied with the complete supporting documents. In the case of CIL, it was paid cash dividends on or before 18 December 2009. However, CIL only filed its TTRA on 28 December 2009, which is notably ten (10) days subsequent to the date of payment of the dividends, and is twenty five (25) days later than the date on which it should have filed the TTRA in order to avail of the tax treaty relief pursuant to the provisions of RMO 1-2000. In order for the TTRA of CIL to have been considered timely filed in accordance with RMO 1-2000, CIL should have filed the same on 03 December 2009, which is at least fifteen (15) days prior to the date of payment of the dividends on 18 December 2009. In support of its position, CIL contends that its right to the preferential tax rate under the RP-Switzerland Tax Treaty had already vested and, thus, cannot be taken away by the issuance of a mere RMO. It should be emphasized that while certain rights may have been vested by law, the State remains to have an interest to protect the proper exercise of such rights and the same is properly within the purview of the implementation of laws by administrative agencies. cHCSDa To this end, administrative agencies have been granted by Congress with the authority to issue rules to regulate the implementation of a law entrusted to them. 2 Thus, rules and regulations promulgated in pursuance of the authority conferred upon the administrative agency, by law, partake of the nature of a statute and similarly enjoy the presumption of constitutionality. 3 This presumption of validity and constitutionality prevails until the administrative issuance is otherwise declared invalid. Thus, the legal consequences resulting from the implementation of such administrative issuances must likewise be upheld. Applying the provisions of RMO 1-2000, it is clear that the TTRA filed on 28 December 2009 is beyond the period prescribed in RMO 1-2000. Consequently, the TTRA of CIL should be denied and the dividends paid by CPC to CIL on 18 December 2009 should be subject to the regular income tax at the rate of thirty percent (30%) of the gross amount thereof, in accordance with Section 28 (B) (1) (a) 4 of the NIRC. Based on the foregoing, we hereby affirm the ruling of the Commissioner in its entirety. The dividends paid by CPC to CIL on 18 December 2009 will be subject to regular income tax at the rate of thirty percent (30%) of the gross amount thereof, pursuant to Section 28 (B) (1) (a) of NIRC, as amended. Very truly yours, (SGD.) CESAR V. PURISIMA Secretary Footnotes 1. Emphasis supplied. 2. Dagan vs. Philippine Racing Commission , G.R. No. 175220, 12 February 2009. 3. Ruben E. Agpalo, Administrative Law, Law on Public Officers and Election Law (2005), citing People vs. Maceren , 79 SCRA 450 (1977). 4. Section 28 of the NIRC provides: "SECTION 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 determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (C): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%) . . . ." [Emphasis supplied]