ITAD BIR Ruling No. 016-14

February 12, 2014 ITAD BIR RULING NO. 016-14 Article 11, Philippines-Japan tax treaty, as amended Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor. Gamboa Streets Makati City 1229 Attention: Alfredo C. Lim Maria Regina A. Ruiz Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 11, 2011 on behalf of Molex Japan Co. Ltd. ("Molex") and S'Next Philippines, Inc. ("S'Next") requesting for a ruling that the interest payments of S'Next to Molex are subject to the preferential withholding tax rate of 10 percent pursuant to Article 11 of the amended 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 1 ("Philippines-Japan tax treaty, as amended") . ACTIcS It is represented that Molex , with principal place of business at 5-4, Fukami-Higashi 1-chome, Yamato, Kanagawa, Japan, is a corporation organized and existing under the laws of Japan per its Articles of Association, and is a resident of Japan within the meaning of the Philippines-Japan tax treaty as certified by the District Director of Yamato Tax Office on January 13, 2011; that Molex is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission ("SEC") on March 2, 2011; that, on the other hand, S'Next is a corporation duly organized and existing under the laws of the Philippines with principal office at 7170 Blue Diamond Street corner Feati Street, Clark Freeport Zone, Pampanga, Philippines; and that, as per certification issued by the Corporate Secretary of S'Next, Molex is not a shareholder of record of S'Next . It is further represented that on October 13, 2010, Molex and S'Next entered into an Intercompany Loan Agreement ("Agreement 1") for the amount of US$300,000.00 at an annual interest of 1.5% payable semi-annually (payment date is June 15th and December 15th) from October 13, 2010 to a maturity date, i.e. , on or before October 12, 2012; that based on the Certificate of Inward Remittance with Reference No. F51012580623000 issued on October 15, 2010 by Rizal Commercial Banking Corporation ("RCBC"), S'Next has an inward remittance amounting to the gross amount of US$300,000.00, less commission and foreign fee, from Bank of Tokyo, Japan by order of Molex ; that on November 2010, another Intercompany Loan Agreement ("Agreement 2") was entered into between Molex and S'Next for the amount of US$1,515,000.00 , to be released on a staggered basis in accordance with the schedule provided in the agreement, and shall bear interest at an annual interest rate of 1.5% payable semi-annually (payment date is June 15th and December 15th) from November 10, 2010 to a maturity date, i.e. , on or before November 9, 2012; and that pursuant to the latter agreement, Molex initially remitted on December 13, 2010 an amount of US$150,000.00 inclusive of commission charges and foreign fee in favor of S'Next , per Certificate of Inward Remittance issued by RCBC dated December 17, 2010. It is further represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Corporate Secretary of S'Next dated March 10, 2011. It is finally represented, as shown in the submitted telegraphic transfer of foreign remittance via the RCBC, that S'Next partially remitted to Molex interests on the subject two (2) loans on June 24, 2011 and December 21, 2011. Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010 , published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: " SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO. " (Emphasis supplied) In view thereof, since the TTRA was filed only on March 11, 2011, after the effectivity dates of the Intercompany Loan Agreements on October and November 2010, this Office hereby DENIES relief on the interest payments under the subject Intercompany Loan Agreements made on and before March 11, 2011 , in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the payment of interests. Accordingly, such payments shall be subject to tax at 20 percent as provided for in Section 28 (B) (5) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (F) Tax on Nonresident Foreign Corporation. xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It provides: ScAHTI "Section 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. xxx xxx xxx" On the other hand, considering that Molex , as represented, has no permanent establishment in the Philippines to which the subject interests are effectively connected, all interest payments of S'Next to Molex under their two (2) Intercompany Loan Agreements on March 12, 2011 and thereafter , are hereby GRANTED relief and are subject to income tax at the preferential rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. It provides: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. xxx xxx xxx" Finally, the Intercompany Loan Agreements are subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 2 at the rate of one peso (PHP1.00) on each two hundred pesos (PHP200.00) or fractional part thereof, of the issue price of the contracts. This ruling is issued on the basis of the foregoing 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. HSaIDc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The Protocol Amending the Philippines-Japan tax treaty was signed on December 9, 2006 and took effect on January 1, 2009. 2. Entitled "An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for other Purposes," signed into law on February 17, 2004, and effective March 20, 2004.