Punongbayan and Araullo

May 25, 2021 ITAD BIR RULING NO. 015-21 Articles 5 and 7 Philippines-Japan tax treaty, as amended Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application that was filed on September 22, 2011 requesting confirmation that guarantee fees paid by Taganito HPAL Nickel Corporation ( THPAL ) to Mitsui and Company Ltd. ( Mitsui ) and Sumitomo Metal Mining Company Ltd. ( SMM ) 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), as amended. 1 FACTS Mitsui is a corporation organized and existing under the laws of Japan and a resident of Japan based on its Articles of Incorporation and Certificate of Residence issued by the Kojimachi Tax Office in Japan. It is engaged in foreign trade, purchase and sale, wholesale, agency, and brokerage business relating to various kinds of commodities. It is also engaged in lending money, guaranteeing and assuming debts, sale and purchase of various receivables, foreign exchange transactions, and conducting other financing business. On March 31, 2008, it was granted a license to do business in the Philippines by the Securities and Exchange Commission (SEC) under the name Mitsui and Company Ltd. Manila Branch, primarily to export, import and sell various kinds of commodities, to carry on an agency business, and to manufacture all types of machines. HTcADC SMM is also a corporation organized and existing under the laws of Japan and a resident of Japan based on its Articles of Incorporation and Certificate of Residence issued by the Shiba Tax Office in Japan. It is engaged in mining and collection of gravel and sand, smelting and refining, metal processing, manufacturing of electronic materials, and financing business. It was also granted a license by the SEC to engage in business in the Philippines under the name 'Sumitomo Metal Mining Company Ltd.-Philippine Representative Office' (SMM's Representative Office). 2 SMM's Representative Office performs liaison work, prepares market surveys and statistics on mining, provides weather, freightage and shipping information providing technical advice, acts as message center for home office, conducts credit investigation, secures geological survey through Filipino geologists, renders technical advice and technical assistance to mining companies, supervises the procurement of mineral ores from home office, and gives financial assistance to mining companies in the Philippines. On the other hand, THPAL is a domestic corporation which produces mixed nickel-cobalt sulfides and exports them as raw materials to SMM Group of Companies' nickel refining facilities. 3 THPAL is a domestic corporation whose shares are partly owned by SMM (62.50%) and by Nickel Asia Corporation (22.50%),a domestic corporation that is engaged in mining of nickel, production of ferronickel and nickel pig iron for the production of stainless steel, and renewable energy development. 4 On August 17, 2011, THPAL and Mitsui entered into an Indemnity Agreement for Guarantee whereby Mitsui guaranteed the payment of a portion ( i.e. ,15%) of THPAL's obligation to the Japan Bank for International Cooperation (JBIC) under a Loan Agreement between THPAL and JBIC executed on July 5, 2011. The Loan Agreement provides THPAL a credit facility not exceeding US$_______________ to finance the construction of its nickel, cobalt and mixed sulfide facility in the Philippines. In consideration, THPAL will pay guarantee fees equivalent to 0.20% of the guaranteed obligation. The fees are payable every 25th day of March and September every year. The Indemnity Agreement was signed by THPAL in the Philippines on August 17, 2011 and by Mitsui in Japan on August 9, 2011, but retroactively took effect on August 3, 2011. It was notarized in the Philippines on August 17, 2011. Similarly, on August 12, 2011, THPAL and SMM entered into an Indemnity Agreement for Guarantee whereby SMM guaranteed the payment of a portion ( i.e. ,85%) of THPAL's obligation to JBIC under the same Loan Agreement. In consideration, THPAL will pay guarantee fees to SMM equivalent to 0.20% of the guaranteed obligation. The fees are also payable every 25th day of March and September. The Indemnity Agreement retroactively took effect on August 3, 2011. The Indemnity Agreement was signed by both parties in the Philippines on August 12, 2011, and was notarized in the Philippines on the same day. Based on the Certification dated September 15, 2011 issued by Mitsui Branch, the latter has no direct or indirect participation in the Indemnity Agreement between THPAL and Mitsui, and that guarantee fees derived by Mitsui from the transaction are not attributable to Mitsui Branch. Moreover, Mitsui Branch's Audited Financial Statements as of March 31, 2012 does not reflect revenue or other income in the form of guarantee fees. SMM likewise attested that its representative office has no direct or indirect participation in the Indemnity Agreement between THPAL and SMM, and that guarantee fees derived by SMM from the transaction are not attributable to the said office. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code),as amended, income derived by a nonresident foreign corporation from sources within 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: * 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, such income is exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: " 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." The provision of guarantee by Mitsui and SMM to THPAL to allow the latter to secure loans from JBIC is in accordance with the business purposes of Mitsui and SMM. Pursuant to their respective Articles of Incorporation, Mitsui is allowed to lend money, guarantee and assume debts, sell and purchase various receivables, enter into foreign exchange transactions, and conduct other financing activities, while SMM is allowed to engage in financing business. Hence, any income derived therefrom is treated as business profits under the tax treaty. In this connection, paragraph 1 of Article 7 and paragraphs 1 and 2 of Article 5 of the Philippines-Japan tax treaty are relevant, viz. : CAIHTE "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." "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 7, 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 such, the profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. Under Article 5, the term 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. Accordingly, since Mitsui and SMM have a branch and a representative office, respectively, in the Philippines, they are deemed to have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-Japan tax treaty. However, the guarantee fees are not attributable to their permanent establishments in the Philippines. It must be emphasized that Mitsui Branch and SMM's Representative Office in the Philippines had no participation whatsoever in the conclusion and execution of the Indemnity Agreements and that the guarantee fees earned by Mitsui and SMM were neither paid nor coursed through their respective permanent establishments. In Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573, September 14, 1989) ,the Supreme Court ruled that income derived by a foreign corporation directly and independently of its branch office in the Philippines cannot be attributed to 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) Considering that the guarantee fees paid by THPAL to Mitsui and SMM are not attributable to a permanent establishment, such fees are, therefore, exempt from income tax in the Philippines pursuant to paragraph 1, Article 7 of the Philippines-Japan tax treaty. Nonetheless, the guarantee fees are subject to VAT under Section 108 (A) of the Tax Code, which provides: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) ... The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. .." In this case, Mitsui and SMM assumed THPAL's payment obligations to its creditor, JBIC, in the Philippines as evidenced by the Indemnity Agreements signed and/or notarized in the Philippines. Considering that the sale by Mitsui and SMM of their services to THPAL, i.e. ,the provision of guarantee to THPAL, was done in the Philippines, the guarantee fees are, therefore, subject to VAT under Section 108 (A) of the Tax Code. DETACa This ruling is issued on the basis of the facts as represented. However, if upon investigation it will 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. License was withdrawn on January 8, 2016. 3. http://www.smm.co.jp/E/glossary/24.html 4. https://nickelasia.com/about-us