ITAD BIR Ruling No. 031-13

February 18, 2013 ITAD BIR RULING NO. 031-13 Articles 5 (Permanent Establishment) and 11 (Interest); Philippines-Singapore tax treaty Manabat Sanagustin and Co. Certified Public Accountants and Management Consultants 9th Floor, The KPMG Centre 6787 Ayala Avenue Makati City Attention: Atty. Maria Carmela M. Peralta Principal, Tax Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 21, 2010 requesting confirmation that interest paid by Energy Development Corporation ("Energy Development") to DBS Bank Ltd. ("DBS Bank") is subject to income tax at the rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . CHDTEA Facts DBS Bank is a foreign corporation and a resident of Singapore based on its amended Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore on October 21, 2010. DBS Bank is located at DBS Building Tower One, 6 Shenton Way, Singapore. Based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on November 12, 2010, DBS Bank is licensed to establish a representative office in the Philippines on March 18, 2002 and no petition to withdraw or cancel such license has been filed to date with the Commission. On the other hand, Energy Development is a domestic corporation located at Building 5, Energy Center, Meritt Road, Fort Bonifacio, Taguig City, Philippines. On June 17, 2010, Energy Development and DBS Bank , among others, entered into an omnibus Credit Agreement where DBS Bank granted Energy Development a loan amounting $15,000,000.00 as part of the $175,000,000.00 loan granted to Energy Development under the Agreement by DBS Bank and the other lenders. The whole loan will be used to fund Energy Development's general corporate funding purposes, to repay its loans to the Philippine National Oil Company, to refinance and repay its other maturing obligations, to rehabilitate its power plants in the Philippines, and to pay for the front-end fees and underwriting fees of the mandated lead arrangers and bookrunners involved in the Agreement. The loan is payable in full on the third anniversary of the Agreement. The loan bears a floating rate of interest equivalent to the London Interbank Offer Rate or LIBOR for a period of six months (or shorter) plus a margin of 3.25 percent per annum. Based on Certificate of Inward Remittance of Foreign Exchange No. 2010-16812-0440 issued by Standard Chartered Bank 1 on September 29, 2010, the proceeds of the loan amounting $169,925,000.00 was remitted and credited to Energy Development's account on June 23, 2010. Standard Chartered Bank is among the lead arrangers and bookrunners of the loan under the Agreement. Based on the Invoice Notice issued by Standard Chartered Bank (Hong Kong) Ltd. 2 on December 9, 2010, Energy Development will make the payment of interest on the loan as follows: Interest Period Principal Interest Rate Interest Date Due Jun. 23 to Dec. 23, $175,000,000.00 3.999560 percent $3,557,941.92 Dec. 23, 2010 2010 (183 days) Based on the instruction of Energy Development to Unionbank of the Philippines 3 on December 23, 2010, 4 it ordered the bank to debit its account and remit the amount of $3,557,941.92 to Standard Chartered Bank (Hong Kong) Ltd. as payment of interest to DBS Bank . Based on the Sworn Certification issued by DBS Bank Ltd.-Manila Representative Office ("DBS Bank Representative Office") on January 31, 2011, the Credit Agreement involving Energy Development as borrower and DBS Bank as one of the lenders was entered into independently and without the participation of DBS Bank Representative Office ; the Agreement was entered by DBS Bank in its own capacity and the rights and obligations arising thereunder are for DBS Bank's and independently of DBS Bank Representative Office ; the interest paid by Energy Development to DBS Bank will not be coursed through DBS Bank Representative Office ; and such interest is not effectively connected with the operations of DBS Bank Representative Office . DBS Bank Representative Office is located at 18th Floor, BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City, Philippines. Ruling In reply, please be informed that Article 11 of the Philippines-Singapore tax treaty, provides relief as follows: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. IHCSET xxx xxx xxx 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on in the other Contracting State in which the interest arises a trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. Under Article 11, interest arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed 15 percent. However, the reduced rate of tax will not apply if the interest is effectively connected with a permanent establishment (if the recipient is an enterprise) or a fixed base (if the recipient is an individual performing independent personal services) which the recipient has in the Philippines. Accordingly, since DBS Bank is a resident of Singapore, interest paid to it by Energy Development and in proportion only to the loan it granted to Energy Development amounting $15,000,000.00 shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 11 of the Philippines-Singapore tax treaty. Furthermore, on the question of permanent establishment, the fact that DBS Bank has a representative office in the Philippines in DBS Bank Representative Office makes the latter a permanent establishment under paragraph 2 (c), Article 5 of the tax treaty, to wit: "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes specially but is not limited to: a) A seat of management; b) A branch; c) An office;" (Emphasis ours) In relation thereto, the Supreme Court, in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), ruled that the taxation of income derived by a foreign corporation which has a branch office in the Philippines will be taxed as income of the branch office only if the business transaction that gives rise to the income has been conducted by the foreign corporation through the branch office , to wit: "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." Accordingly, we do not consider interest paid by Energy Development to DBS Bank to be effectively connected DBS Bank Representative Office . This is because the Credit Agreement in question involving Energy Development as borrower and DBS Bank as one of the lenders was entered into independently and without the participation of DBS Bank Representative Office ; the Agreement was entered by DBS Bank in its own capacity and the rights and obligations arising thereunder are for DBS Bank's and independently of DBS Bank Representative Office ; and the interest paid by Energy Development to DBS Bank will not be coursed through DBS Bank Representative Office and will not be accounted to DBS Bank Representative Office's operations. This being the case, we maintain that interest paid by Energy Development to DBS Bank shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 11 of the Philippines-Singapore tax treaty. SEcADa Finally, under Section 179 of the National Internal Revenue Code of 1997, as amended, the whole Credit Agreement, being a debt instrument, are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan (the Philippine peso equivalent of $175,000,000.00), 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." 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 Footnotes 1. Located at Standard Chartered Bank Building, 6788 Ayala Avenue, Makati City, Philippines. 2. Located at 11th Floor, Standard Chartered Bank Tower, 388 Kwun Tong Road, Kwun Tong, Hong Kong. 3. Located at UnionBank Plaza, Meralco Avenue corner Onyx and Sapphire Roads, Ortigas Center, Pasig City, Philippines. 4. Since the TTRA was filed on December 21, 2010 and the first payment of interest on the loan was made later on December 23, 2010 , such interest paid on that date and thereafter shall be subject to relief (exemption from income tax or reduction of tax) pursuant to 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") , 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. " (Emphasis ours)