ITAD BIR Ruling No. 033-13

February 21, 2013 ITAD BIR RULING NO. 033-13 Articles 5 & 8, Philippines-Korea tax treaty KEPCO Philippines Corporation 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City Attention: Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your application for tax treaty relief received on 28 April 2010 requesting confirmation that business profits received by Korea Electric Power Corporation ("KEPCO") from KEPCO Philippines Corporation ("KEPHILCO") for the year 2009 are exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("RP-Korea tax treaty") . IDScTE Facts It is represented that KEPCO is a foreign corporation organized and existing under the laws of Republic of Korea ("Korea") and is a resident thereof based on the Residence Certificate issued by the National Tax Administration of Korea dated 04 March 2010; that KEPCO is situated at 167 Samseong-Dong, Gangnam-Gu, Seoul 135-791 Korea; that KEPCO is not registered as a corporation or partnership in the Philippines based on the Certificate issued by the Securities and Exchange Commission (SEC) dated 21 April 2010; and that, on the other hand, KEPHILCO is a corporation organized and existing under the laws of the Philippines, with address at the 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Philippines. It is further represented that KEPHILCO has an existing Rehabilitate, Operate, Maintain and Management Agreement (ROMM) with the National Power Corporation (NPC) for the 650 MW Malaya Power Plant located in Pililia Rizal. In relation to this, on 03 September 1996, KEPHILCO and KEPCO entered into a Technical Service Agreement (TSA),and pursuant to its terms and conditions, KEPCO shall provide certain services to KEPHILCO for an agreed fee. For the year 2009, the duration of the services rendered was reflected in the Certification for the period of services of KEPCO personnel in the Philippines dated 08 March 2010. It states that the aggregate period of the service was for 35 days. This fact was further supported by certified photocopies of the passports of the deployed KEPCO's personnel showing the dates of arrival and departure in the Philippines. It is further represented that payment for services rendered under the Technical Service Agreement were made, as evidenced by the certification of the treasurer of KEPHILCO dated 12 October 2012 on the following dates: Date of Payment Description Amount 04/21/2009 1st Quarter 2009 57,808,000.00 07/14/2009 2nd Quarter 2009 57,746,000.00 11/04/2009 3rd Quarter 2009 57,025,200.00 01/22/2010 4th Quarter 2009 55,440,000.00 Total (in PHP) 228,029,200.00 ============= It is finally represented that the transactions subject of this ruling are not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by Mr. Guillermo P. Dabbay Jr.,Corporate Secretary of KEPHILCO dated 27 October 2010. Ruling In reply, please be informed that under Section III (2) of Revenue Memorandum Order (RMO) No. 01-00, 1 the TTRA 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, viz. : "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 Consequently, BIR Form Nos. TC 001 and TC 002 prescribed under RMO 10-92 are hereby declared obsolete. xxx xxx xxx" 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. ATHCDa 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 of the Court of Tax Appeals is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. As culled from the records, the TTRA was received on 28 April 2010 and the subject transactions occurred from November 2009 to January 2010. Clearly, the TTRA did not precede the payment of the business profits for at least 15 days. 2 The business profits were paid months before the filing of the TTRA. Thus, this Office denies the TTRA due to the failure to comply with Section III (2) of RMO No. 01-00. As to the applicable tax rate, please be informed that the business profits paid to KEPCO are subject to income tax pursuant to Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, thus: "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%)." In view of the foregoing, the business profits subject of this application shall be subject to 30% income tax. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Procedures for Processing Tax Treaty Relief Application, November 25, 1999. 2. 13 May 2010, the fifteenth (15th) day from date of filing the TTRA.