Sycip Gorres Velayo and Co.

April 4, 2019 ITAD BIR RULING NO. 005-19 Item 5 of the Protocol to the Philippines-Japan tax treaty, as amended; BIR Ruling No. DA-39-05 Sycip Gorres Velayo and Co. 6760 Ayala Avenue Makati City Gentlemen : This refers to your tax treaty relief application filed on November 27, 2012 requesting confirmation that the conversion of a portion of the profits of The Bank of Tokyo-Mitsubishi UFJ Ltd.-Manila Branch (" Bank of Tokyo-Manila Branch ") to its permanently assigned capital is subject to branch profits remittance tax at the rate of 10% pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Japan tax treaty "),as amended. 1 FACTS Bank of Tokyo-Manila Branch is the branch office in the Philippines of The Bank of Tokyo-Mitsubishi UFJ Ltd. (" Bank of Tokyo ") (formerly The Bank of Tokyo-Mitsubishi Ltd. ) of Japan. Bank of Tokyo is a corporation organized and existing under the laws of Japan and a resident thereof based on its Articles of Incorporation and Certification of Residence issued by the Kojimachi Tax Office in Japan. The purpose of Bank of Tokyo is to accept deposits and installment savings; extend loans; discount bills and notes; engage in exchange transactions; guarantee obligations of others; accept bills and notes; and engage in other incidental banking activities. Based on its Certificate of Corporate Filing/Information, Bank of Tokyo is licensed by the Securities and Exchange Commission to establish a branch office in the Philippines on September 23, 1977, and to date no petition for the withdrawal or cancellation of license has been filed by Bank of Tokyo .The branch office referred herein is Bank of Tokyo-Manila Branch ,with principal place of business in Makati City, Philippines. Based on Bank of Tokyo-Manila Branch 's Audited Financial Statements (" AFS ") as of March 31, 2012, it was authorized by the Bangko Sentral ng Pilipinas (" BSP ") to operate as a full commercial bank in the Philippines on March 30, 1995. The head office fully guarantees the payment of all liabilities of the branch office. Bank of Tokyo-Manila Branch deals primarily in wholesale banking providing financial services mainly to local subsidiaries and affiliates of Japanese corporations whose head offices have existing relationships with Bank of Tokyo ,and to sovereign entities and selected prime corporate customers. As stated in the AFS, under Republic Act No. 7721 (" RA 7721 "), 2 a foreign bank with existing branches in the Philippines is required to inwardly remit to its branches and convert into Philippine currency the US dollar equivalent of 210 million pesos, as the branches' permanently assigned capital. This amount was computed at the time of the effectivity of RA 7721 on June 5, 1994 when the exchange rate was Php26.979 to one (1) US dollar. Based on a sworn statement issued by Bank of Tokyo-Manila Branch on February 15, 2018, it confirmed that RA 7721 and RA 10641 3 require the inward remittance of funds from the head office of the foreign bank to its branches in the Philippines as the branches' permanently assigned capital. Based on BSP's letter to the Bank of Tokyo-Manila Branch dated November 6, 2012, the BSP approved the branch office's plan to increase its permanently assigned capital, which will be done as follows: a) The head office will infuse additional funds to the branch office amounting to 1.5 billion yen; and b) The branch office will transfer to its permanently assigned capital, a portion of its unremitted profits in fiscal years 2012 and 2011 amounting to __________ pesos. Based on Bank of Tokyo-Manila Branch 's AFS, as of March 31, 2012, the branch office's unremitted profits under its Net Due to Head Office and Other Branches Account was Php__________. Bank of Tokyo-Manila Branch 's plan to increase its permanently assigned capital was approved by the head office on November 28, 2018 based on an internal memorandum issued to the branch office. RULING In reply, please be informed that under Section 28 (A) (5) of the National Internal Revenue Code of 1997, as amended (" Tax Code "),a branch profits remittance tax (" BPRT ") at the rate of 15% is imposed on the profits remitted by a branch office to its head office abroad, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority).The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." However, under Section 32 (B) (5) of the Tax Code, such remitted profits are subject to relief (exemption or reduction of tax) to the extent required by any treaty obligation on the Philippine government, to wit: " SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, Item 5 of the Protocol to the Philippines-Japan tax treaty reduces the rate of BPRT to 10% on earnings remitted by a permanent establishment in the Philippines to its head office in Japan, thus: "5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 per cent of the amount of such earnings which is remitted abroad. For the purposes of this paragraph, the term "earnings" means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines." Under paragraphs 1 and 2, Article 5 of the Philippines-Japan tax treaty, Bank of Tokyo-Manila Branch constitutes a permanent establishment in the Philippines, thus: " Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet ; b) a branch;" (Emphasis ours) Accordingly, earnings or profits remitted by Bank of Tokyo-Manila Branch to its head office in Japan are subject to a reduced BPRT of 10% pursuant to the aforecited provision. The BPRT shall apply to the portion of Bank of Tokyo-Manila Branch 's unremitted profits which were transferred to its permanently assigned capital account. This transfer constitutes an indirect remittance to the head office because it required the approval of the head office prior to the transfer and crediting of the profits to another account, the branch office's permanently assigned capital. It is understood that directly crediting those profits to Bank of Tokyo-Manila Branch 's capital is the same as physically transferring those profits from the branch office in the Philippines to the head office in Japan, and subsequently returning those profits to the Philippines. (BIR Ruling No. ITAD 39-05 dated January 28, 2005) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. 2. An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes. 3. An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the purpose Republic Act No. 7721.