Sycip Gorres Velayo and Co.

February 2, 2018 ITAD BIR RULING NO. 009-18 Articles 5 and 7 Philippines-Japan tax treaty, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on October 27, 2014 requesting confirmation that guarantee fees paid by Sumitomo Corporation of the Philippines (" Sumitomo Philippines ") to Sumitomo Corporation (" Sumitomo ") are exempt from income tax 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 "). 1 cEaSHC FACTS Sumitomo is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation and Residence Certificate issued by the Kyobashi Tax Office in Japan. Sumitomo is engaged in the export, import, and sale of iron, steel, non-ferrous metals and related products, and ore and other mineral resources; electrical wires, cables and electrical, electronic or communication devices as well as parts therefor; and machinery, instruments, tools, measuring devices, weighing devices and medical tools, firearms, vehicles, ships and aircraft and parts therefor, among others. It is also engaged in the lending of money, guaranteeing debts, sale and purchase of credit obligations, currency trading, sale and purchase of securities, and other financial business. Based on the Certification of Corporate Filing/Information issued by the Securities and Exchange Commission, Sumitomo is licensed to engage in business in the Philippines since March 20, 1967, and no petition has been filed to date for the withdrawal of its license. On the other hand, Sumitomo Philippines is a domestic corporation engaged in the manufacture, importation, assembly, furnishing, development and supply of raw materials and semi-finished products for the manufacture, assembly or processing of electronics and semiconductor products. Based on its General Information Sheet and Audited Financial Statements in 2014, Sumitomo Philippines ' immediate parent is Sumitomo Corporation Asia and Oceania Pte. Ltd. of Singapore, and its ultimate parent is Sumitomo of Japan. On May 19, 2014, Sumitomo Philippines and Sumitomo entered into a Memorandum of Understanding (" MOU ") where Sumitomo agreed to provide guarantee to Sumitomo Philippines with respect to loans obtained from Bank of Tokyo-Mitsubishi UFJ Manila (" Bank of Tokyo Manila "), Citibank N.A. Manila Branch (" Citibank Manila ") and Bank of the Philippine Islands (" BPI ") (collectively, " lenders "). Guaranteed loans will not exceed an aggregate of $20,000,000.00 at any time. Sumitomo provides guarantee by issuing a letter of guarantee or making a verbal assurance to the lenders. In consideration, Sumitomo Philippines will pay guarantee fees to Sumitomo equivalent to 0.20% per annum (" p.a. ") based on Sumitomo Philippines ' average outstanding loans at the end of each month. The MOU takes effect on April 1, 2014 and will be in effect as long as Sumitomo provides a guarantee. The guarantee provides economic benefit to Sumitomo Philippines in the form of low interest rates. In October, November and December 2014, by way of promissory notes, Sumitomo Philippines obtained loans amounting to $__________ up to $__________ in single and separate drawdowns. The loans have short-term maturity of 20 to 30 days and may be renewed immediately after maturity. The loans bear interest at 0.4730% p.a. in case of Bank of Tokyo Manila ; 0.4333% p.a., Citibank Manila ; and 1.20% p.a., BPI . These rates are significantly lower than those quoted by commercial banks in the Philippines and published by the Bangko Sentral ng Pilipinas, 2 where the average minimum commercial rates in October 2014 is 4.4178% p.a.; in November 2014, 4.4271% p.a.; and in December 2014, 4.4742% p.a. Based on the affidavit issued by Sumitomo Corporation Manila Branch (" Sumitomo Manila Branch "), Sumitomo undertakes to issue a letter of guarantee to Bank of Tokyo Manila and provide verbal assurance to Citibank Manila and BPI with respect to loans granted to Sumitomo Philippines . The MOU was entered into without the participation of Sumitomo Manila Branch . Sumitomo Manila Branch is not a material factor in the realization of guarantee fees paid by Sumitomo Philippines to Sumitomo . The guarantee fees are not realized in or effectively connected with the ordinary course of trade or business of Sumitomo Manila Branch . The guarantee fees are not used in, or held for use in, the conduct of trade or business of Sumitomo Manila Branch . Any income from the transaction will inure to the sole benefit of Sumitomo , and Sumitomo Philippines does not and will not partake of such income. In relation to that affidavit, on February 27, 2014, Sumitomo issued a Letter of Guarantee to Bank of Tokyo Manila where Sumitomo guarantees the fulfillment of Sumitomo Philippines ' obligations to Bank of Tokyo Manila under the credit facilities up to $__________, including interest and other charges, in the event Sumitomo Philippines fails to pay any amount due. Based on the sworn statement issued by Sumitomo Philippines , the guarantee fees subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 30%, to wit: " 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, the income is exempt 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." In this regard, since the act of guaranteeing debts is among the business activities of Sumitomo , income derived therefrom is considered profits of an enterprise or business profits. The taxation of this income is provided in paragraph 1, Article 7 of the Philippines-Japan tax treaty below: CTIEac " Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." Under Article 7, profits of an enterprise of a Contracting State derived in the other Contracting State may be taxed in the other State, but only so much of them as is attributable to a permanent establishment situated in that State. Relative thereto, the term permanent establishment is defined in paragraphs 1 and 2, Article 5 of the treaty below: " 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; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources." Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a store or other sales outlet, a branch, an office, a factory, and a workshop. In the case at hand, since Sumitomo is engaged in business in the Philippines through a branch, namely, Sumitomo Manila Branch , it has a permanent establishment pursuant to Article 5 of the Philippines-Japan tax treaty. On whether guarantee fees paid to Sumitomo are attributable to Sumitomo Manila Branch , the act of providing guarantee by way of issuing a letter of guarantee or making a verbal assurance to the lenders is done solely by Sumitomo and not by Sumitomo Manila Branch . In case of default by Sumitomo Philippines , it is Sumitomo and not Sumitomo Manila Branch who will shoulder Sumitomo Philippines ' credit obligations to the lenders. Furthermore, Sumitomo Manila Branch reiterated that: 1. The MOU for guarantee is between Sumitomo and Sumitomo Philippines and without the participation of Sumitomo Manila Branch ; hence, Sumitomo Manila Branch is not a material factor in the realization of guarantee fees paid by Sumitomo Philippines to Sumitomo ; 2. The guarantee fees are not realized in or effectively connected with the ordinary course of trade or business of Sumitomo Manila Branch , nor such fees used in, or held for use in, the conduct of its trade or business; and 3. Any income from the guarantee will inure solely to the benefit of Sumitomo , and Sumitomo Philippines does not and will not partake of such income. In Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , the Supreme Court ruled that income derived by a foreign corporation with a branch office in the Philippines is not necessarily that of the branch office unless the business transactions that give rise to the income is conducted through the branch office, thus: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation ." (Emphasis ours) This being the case, where guarantee fees paid by Sumitomo Philippines to Sumitomo of Japan are not attributable to Sumitomo Manila Branch , such fees are exempt from income tax in the Philippines pursuant to paragraph 1, Article 7 of the Philippines-Japan tax treaty. SaCIDT 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. As amended by the 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. http://www.bsp.gov.ph/statistics/efs_fsa1.asp . n Note from the Publisher: Copied verbatim from the official document.