ITAD BIR Ruling No. 017-14

February 12, 2014 ITAD BIR RULING NO. 017-14 Article 11 (Interest), Philippines-Netherlands tax treaty Puyat Jacinto and Santos 12th Floor, VGP Center (formerly Manila Bank Building) 6772 Ayala Avenue Makati City Attention: Atty. Virginia B. Viray Atty. Pearl Grace G. Cabali Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on April 11, 2012 requesting confirmation that interest paid by Monza SPV-AMC, Inc. ("Monza") (formerly EB Management Capital SPV-AMC ) to AOCZ Investments 1 BV ("AOCZ Investments") is subject to income tax at the rate of 15 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . DaCEIc AOCZ Investments is a foreign corporation and a resident of the Netherlands based on its amended Articles of Association and Declaration of Residence issued by the Tax Administration of Rivierenland in the Netherlands on February 16, 2012. AOCZ Investments is located at Naritaweg 165, Telestone, Amsterdam, the Netherlands. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on March 12, 2012. On the other hand, Monza is a domestic corporation located at 14th Floor, Robinsons Summit Centre, 6783 Ayala Avenue, Makati City, Philippines. On July 31, 2007, Monza and AOCZ Investments entered into a Loan Agreement where AOCZ Investments granted Monza a loan not exceeding $8,000,000.00 to finance Monza's investment in nonperforming loans and to serve as its additional working capital. The loan will be paid in full on the third anniversary of its drawdown or later as agreed upon by the parties. The loan bears interest at the rate of 15 percent per annum payable annually on each anniversary of the drawdown. On July 31, 2007, Monza issued a Promissory Note to AOCZ Investments confirming receipt of a loan from the latter amounting $7,207,469.99 and promising to pay such loan under the terms and conditions of the Agreement. Based on the Credit Advice issued by the Export and Industry Bank on August 15, 2007, the loan amounting $7,207,469.99 (P331,543,619.54) was credited to Monza's account on that date. On June 25, 2010, due to the prevailing economic situations, the Agreement was amended to extend the term of the Agreement for another three years with respect to the unpaid principal of the loan amounting to $1,964,562.82 as of that date. On February 29, 2012, due to the prevailing economic situations and the decreasing interest rates in the market, the Agreement was amended again to reduce the interest rate on the loan from 15 percent to 3 percent per annum. Based on the letter issued by the Bangko Sentral ng Pilipinas ("BSP") to Monza on March 22, 2012, the loan subject of the amended Agreement is registered with the BSP under Registration No. BSP-IOD (FB) 2012-611. The outstanding principal of $1,964,562.82 will be paid in full on July 31, 2013. Based on the Transaction Tickets issued by Monza on April 30, May 31 and June 30, 2012, Monza has accrued interest expense on the loan for each month and which loan had outstanding principal of $1,012,109.54 as of those dates, to wit: Date of Accrual Interest Rate Number of Days Interest Accrued Exchange Rate Lapsed (in Pesos) (in Pesos) Apr. 30, 2012 3.5294 percent 30 days 125,367.41 42.700 May 31, 2012 3.5294 percent 31 days 130,004.44 42.851 June 30, 2012 3.5294 percent 30 days 125,590.41 42.700 Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , which covers income derived or which accrued on November 4, 2010 and thereafter, any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau before the payment of such income, to wit: " 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 or 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 ours) Also, under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , which covers income derived or which accrued before November 4, 2010 , any availment of relief shall be preceded by an application filed at ITAD at least fifteen days before the payment of such income, to wit: IDESTH "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief . . ." (Emphasis ours) This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation . In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. acEHCD Furthermore, the necessary requirement in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011) . In view of the foregoing, since the Loan Agreement that gives rise to interest is in effect since July 31, 2007 , but the relevant TTRA was filed only on April 11, 2012 , this Office hereby DENIES relief on all interests paid by Monza to AOCZ Investments on or before April 11, 2012 , pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO 1-2000. Accordingly, said interests shall be subject to income tax at the rate of 20 percent under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (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." On the other hand, interest paid to AOCZ Investments on April 12, 2012 and thereafter on such loan with an outstanding principal reduced to $1,012,109.54 as of April 30, 2012 (from the original of $7,207,469.99 ) is subject to relief under Article 11 of the Philippines-Netherlands tax treaty, to wit: CIAcSa "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of the interest in all other cases." Under Article 11, interest arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment; on any loan of whatever kind granted by a bank, or any other financial institution; or in respect of public issues of bonds, debentures or similar obligations, and (b) 15 percent in all other cases. Accordingly, since interest paid by Monza to AOCZ Investments under the Loan Agreement is not in connection with the sale on credit of any industrial, commercial or scientific equipment, nor in respect of public issues of bonds, debentures or similar obligations, and since AOCZ Investments , the lender, is not a bank or financial institution, such interest paid to AOCZ Investments on April 12, 2012 and thereafter shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2 (b), Article 11 of the Philippines-Netherlands tax treaty. Furthermore, under Section 179 of the Tax Code, the Agreement, being a debt instrument, is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan actually drawn by Monza (the Philippine peso equivalent of $7,207,469.99), to wit: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan." SHIETa 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue