ITAD BIR Ruling No. 028-13

February 18, 2013 ITAD BIR RULING NO. 028-13 Article 11, Philippines-Japan tax treaty, as amended; ITAD Ruling No. 022-10; ITAD Ruling No. 014-10 Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor. Gamboa Sts., 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 ("Philippines-Japan tax treaty, as amended") . cICHTD Basic Facts It is represented that Molex is a corporation organized and existing under the laws of Japan per its Articles of Association; that Molex has its principal place of business at 5-4, Fukami-Higashi 1-Chome, Yamato, Kanagawa, Japan; that Molex 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 a 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 for the amount of US$300,000.00 at an annual interest of 1.5% payable semiannually (payment date is June 15th and December 15th) from October 13, 2010 to a maturity date, i.e. , on or before October 12, 2012; and 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 . It is finally 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. Ruling In reply, please be informed that a foreign corporation like Molex , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this case, since Molex is a nonresident foreign corporation, such interest derived by Molex in the Philippines is generally subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the Tax Code of 1997, which states: "SEC. 28. Rates of Income Tax on Foreign Corporation . 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 corporation 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: "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: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." ICAcHE Hence, the provision of Article 11 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "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 percent of the gross amount of the interest. . . ." Based on the above provisions, interest on foreign loans is generally taxable in the Philippines at the rate of 20 percent. However, interest derived by a corporation which is a resident of Japan may qualify for a preferential rate of 10 percent of the gross amount thereof, under the Philippines-Japan tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. Relative thereto, the availment of preferential tax rate under a tax treaty is governed by Revenue Memorandum Order ("RMO") No. 72-2010. 1 Section 14 of which provides: "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." In view of the foregoing, and considering that Molex , as represented, has no permanent establishment in the Philippines to which the subject interest is effectively connected, this Office is of the opinion and so holds that the interests derived by Molex from S'Next under the Intercompany Loan Agreement effective March 12, 2011 are subject to Philippine income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended by Article IV of the new protocol (BIR Ruling No. 022-10 dated August 25, 2010 and BIR Ruling No. ITAD 014-10 dated July 1, 2010) . However, any interest payment made to Molex on or before March 11, 2011 shall be subject to the final withholding tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the Tax Code of 1997, as amended, in relation to Section 14 of RMO 72-2010. Finally, the Intercompany Loan Agreement is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 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 contract. 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. IHCSET Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties (effective November 4, 2010).