Request for Review of BIR Ruling No. ITAD 274-11 Dated 18 November 2011

April 10, 2012 DOF OPINION Fernandez Santos & Lopez Certified Public Accountants 16th floor, Pacific Star Building Cor. Sen. Gil Puyat and Makati Avenues 1200 Makati City, Metro Manila Attention: Atty. Eliseo A. Fernandez SUBJECT : Request for Review of BIR Ruling No. ITAD 274-11 Dated 18 November 2011 This has reference to your request for review on behalf of your client Mr. Reinhard Brandner (the "taxpayer"), of Bureau of Internal Revenue ("BIR") Ruling No. ITAD 274-11 dated 18 November 2011, which denied the Tax Treaty Relief Application (TTRA) filed by the taxpayer on 11 December 2007 for the exemption from the tax on capital gains from the sale of his shares in Allgemeine Bau-Chemie Phil., Inc. (ABCP) to ABCP as imposed by the National Internal Revenue Code of 1997, as amended ("NIRC"), pursuant to Article 14 of the Convention Between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("RP-US Tax Treaty"). As culled from the records, the facts are as follows: It is represented that the taxpayer is a Swiss citizen residing in Florida, United States of America. He is the stockholder of one million one hundred twenty five thousand one hundred sixty seven (1,125,167) shares with par value of Php10.00 per share in ABCP (the "shares"), a corporation duly organized and existing under the laws of the Philippines, with principal address at Alabang, Muntinlupa City, Philippines. On March 19, 2007, the taxpayer sold the said shares back to ABCP. On December 11, 2007, the TTRA was filed before the International Tax Affairs Division ("ITAD"), and after several communications between the ITAD and the taxpayer, the contested BIR Ruling No. ITAD 274-11 was issued on November 18, 2011, stating that: SCaTAc "In view of the foregoing, since the consideration for the buyback of the shares in the ABCP was received by Mr. Brandner on March 19, 2007 (the date of the Deed of Sale of Shares of Stock) or earlier, and the subject TTRA was filed only on December 11, 2007, 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. Consequently, said gains shall be subject to income tax at the rate provided under Section 25(B), in relation to Section 24(C) of the National Internal Revenue Code of 1997, as amended, . . ." The BIR cited the relevant provisions of Revenue Memorandum Order (RMO) No. 1-2000, entitled "Procedure for Processing of Tax Treaty Relief Applications", dated 25 November 2000. The taxpayer requested the review of BIR Ruling No. ITAD 274-11 before this Office, and alleged that the said ruling was erroneous for the following reasons: 1. RMO No. 1-2000 has no bearing in the subject TTRA since RMO No. 1-2000 has been modified by RMO 30-2002, 1 and thus the TTRA is governed by RMO 30-2002 only, and no longer by RMO 1-2000. Consequently, the taxpayer alleges that BIR Ruling No. ITAD 274-11, having as basis therefor provisions under RMO 1-2000 which have been amended or modified by RMO 30-2002, is null and void, and therefore should be reconsidered, withdrawn and cancelled. 2. The length of time taken by the BIR to issue the contested ruling without any notice to the taxpayer that the prescribed period has not been complied with holds the BIR in estoppel. After a careful review of the case records, we see no reason to depart from the findings and conclusions of the BIR. The contention of the taxpayer that RMO No. 1-2000 is not applicable in this instance finds no merit. It is clear that RMO 30-2002, which merely prescribes the form to be filed for TTRA, did not repeal RMO 1-2000 but merely modified the latter. In fact, the repealing clause of RMO 3-2002 states: TCcSDE V. REPEALING CLAUSE This Order modifies RMO No. 1-2000 dated November 25, 1999 and amends all other issuances and portions thereof inconsistent herewith. 2 As such, the provisions of RMO 1-2000, particularly that prescribing the period within which to file the TTRA, remains applicable and governing in this instance. RMO 1-2000, entitled Procedures for Processing Tax Treaty Relief Application, issued on 25 November 1999, prescribes the requirement that any availment of a tax treaty relief shall be preceded by an application filed with the ITAD at least fifteen days before the transaction, thus: 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. . . . " 3 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. The prior filing of the TTRA is not a new requirement imposed by RMO 1-2000; its predecessor, RMO 10-1992, 4 prescribes the same requirement of filing the tax treaty relief application at least fifteen days prior to the transaction. TCacIE In view of the above, it is clear that it has been the long-standing rule that in order to avail of any relief provided in a Philippine tax treaty, the application thereto must be filed before the occurrence of the transaction. We note that the sale of the shares by the taxpayer to ABCP occurred on 19 March 2007. Accordingly, the TTRA should have been filed fifteen (15) days before the intended transaction. In this case, the TTRA was filed around nine (9) months after the transaction, or on 11 December 2007. Clearly, the TTRA was filed beyond the prescribed period. We note that administrative agencies have been granted by Congress with the authority to issue rules to regulate the implementation of a law entrusted to them. 5 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. 6 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. The present TTRA clearly was filed beyond the time required under RMO 1-2000. Accordingly, the BIR was correct in denying the TTRA filed by Mr. Brandner. As regards the contention that the BIR was estopped in not denying the TTRA upon filing and instead requested for additional documents regarding the taxpayer's request, we need only state that the BIR is not precluded from requesting additional documents in connection with the TTRA. In fact, RMO 1-2000 imposes upon the taxpayer the obligation to submit all supporting documents necessary for its application, to wit: IV. Procedures: 1. Taxpayer 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. 7 That the BIR requested additional documents could not be taken against the BIR, as it only sought to clarify and verify details regarding the transaction. Based on the foregoing, we hereby affirm the ruling of the Commissioner in its entirety. The sale of shares in ABCP by Mr. Brandner to ABCP on 19 March 2007 will be subject to the rate provided under Section 25 (B) 8 in relation to Section 24 (C) 9 of NIRC, as amended. aTEADI Based on the foregoing, we hereby affirm the ruling of the Commissioner in its entirety. The sale of shares of stock in ABCP by Mr. Brander to ABCP on 19 March 2007 will be subject to regular income tax rate pursuant to Section 25 (B) in relation to Section 24 (C) of NIRC, as amended. Very truly yours, (SGD.) CESAR V. PURISIMA Secretary Footnotes 1. Authorizing the use of BIR Form No. 1928 Application for Relief from Double Taxation (Gains from Sale or Transfer of Shares of Stock in Philippine Corporation) for processing of tax treaty relief applications involving gains from sale or transfer of shares of stocks in a Philippine corporation including gains from sale or transfer of unit of participation in a Philippine partnership. (Issued November 4, 2002) 2. Emphasis supplied. 3. Emphasis supplied. 4. Issued 1 February 1992. 5. Dagan vs. Philippine Racing Commission , G.R. No. 175220, 12 February 2009. 6. Ruben E. Agpalo, Administrative Law, Law on Public Officers and Election Law (2005), citing People vs. Maceren , 79 SCRA 450 (1977). 7. Emphasis supplied. 8. SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. xxx xxx xxx 9. SEC. 24. Income Tax Rates. xxx xxx xxx (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange . The provisions of Section 39 (B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,000 5% On any amount in excess of P100,000 10%