Request for Review of BIR Ruling No. ITAD 096-12

April 19, 2012 DOF OPINION Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Wilfredo U. Villanueva Principal, Tax Services SUBJECT : Request for Review of BIR Ruling No. ITAD 096-12 Gentlemen : This is in reference to your request for review, on behalf of your client, Mitsubishi Corporation-Tokyo Head Office ("Mitsubishi Tokyo"), of Bureau of Internal Revenue ("BIR") Ruling No. ITAD 096-12 dated 16 February 2012, which held that the Tax Treaty Relief Application ("TTRA") filed by Mitsubishi Tokyo on 25 January 2010 for application of the preferential tax rate of ten percent (10%) to dividends declared by Ayala Corporation ("Ayala") 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 Ayala on 02 February 2012 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: "In view of the foregoing, since the dividends received by Mitsubishi Corporation Tokyo Head Office were paid on February 2, 2010, and the subject TTRA was only filed on January 25, 2012 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: Mitsubishi Tokyo is a corporation organized and existing under the laws of Japan. It is not registered as a corporation or partnership in the Philippines but is licensed to do business in the Philippines through its Manila Branch. On the other hand, Ayala is a corporation existing under the laws of the Philippines. Based on the Secretary's Certificate dated 23 December 2009, issued by the Corporate Secretary of Ayala, during the meeting of the Board of Directors held on 10 December 2009, it declared cash dividends to all shareholders of Ayala as of 08 January 2010 in the amount of Two Pesos (Php2.00) per share of stock, or a total of Nine Hundred Ninety Six Million Eight Hundred Thousand Pesos (Php996,800,000.00). Based on the Secretary's Certificate dated 23 December 2009, as of 08 January 2010, Mitsubishi Tokyo holds 52,564,617 common shares of stock out of the 498,361,838 total issued and outstanding common shares of stock of Ayala, which is equivalent to 10.55% of the total and outstanding common shares of stock of Ayala. IASCTD On 25 January 2010, Mitsubishi Tokyo filed its TTRA with the BIR ITAD to request confirmation that the dividends to be paid by Ayala to Mitsubishi Tokyo on 02 February 2012 are subject to a preferential tax rate of ten percent (10%) pursuant to 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, as amended by the Protocol Amending 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 ("RP-Japan Tax Treaty"), effective 01 January 2009. Mitsubishi Tokyo requested the review of BIR Ruling No. ITAD 096-12 before this Office, and alleged that upon showing compliance with the requirements of the RP-Japan Tax Treaty on the application of the preferential tax treatment on dividends, it necessarily follows that the BIR shall apply the preferential tax rates in the said treaty. It further argued that the requirement of securing a prior ruling as well as the period prescribed for the filing of the TTRA under RMO 1-2000 should not be strictly implemented because the said procedure is not mandatory. Nevertheless, Mitsubishi Tokyo asserted that it is entitled to the application of the preferential tax rate under the RP-Japan Tax Treaty on the dividends to be paid by Ayala because it already substantially complied with the provisions of RMO 1-2000 by actually filing its TTRA on 25 January 2010, prior to the intended payment of dividends on 02 February 2010. 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-Japan Tax Treaty provides the following rules with respect to dividends: "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 Contracting State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed: ITECSH a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 percent 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 percent of the gross amount of the dividends in all other cases. xxx xxx xxx (4) 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 assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident." Based on the afore-quoted provisions of the RP-Japan Tax Treaty, dividends paid to a company which is a resident of Japan 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 or of the total shares issued by the company during the period of six (6) months immediately preceding the date of payment of dividends, and at a rate not exceeding fifteen percent (15%), in all other cases. The BIR issued RMO 1-2000 in order to implement the proper exercise of the grant of the aforementioned preferential tax rates and prescribes the procedure to be followed in availing tax treaty reliefs. In the said BIR issuance, in cases of tax treaty relief availments 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: "III. Policies : In order to achieve the above-mentioned objectives, the following policies shall be observed: EDATSC 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. 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. 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 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 Mitsubishi Tokyo, its TTRA was filed on 25 January 2010, which is notably eight (8) days before the scheduled payment of dividends on 02 February 2012. Thus, in order for the TTRA to have been considered as timely filed in accordance with RMO 1-2000, Mitsubishi Tokyo should have filed the same on 18 January 2010, which is fifteen (15) days before the scheduled payment of dividends on 02 February 2010. In support of its position, Mitsubishi Tokyo contends that the RP-Japan Tax Treaty provides for a complete and unconditional grant of tax benefits subject to the fulfillment of all the elements required for the availment of said tax benefits. Further, it is of the opinion that RMO 1-2000 cannot take precedence over the provisions of tax treaties and its provisions should not be considered mandatory, especially if its application would contravene existing tax treaties of the Philippines. It bears emphasizing that while certain rights may have been granted by law and treaties, 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. TaCDcE 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 25 January 2010 did not comply with the fifteen (15)-day period prescribed in RMO 1-2000. Consequently, the TTRA of Mitsubishi Tokyo should be denied. We hereby affirm the ruling of the Commissioner in its entirety. The dividends paid by Ayala to Mitsubishi Tokyo on 02 February 2010 shall 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) 4 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: "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 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]