ITAD BIR Ruling No. 049-12

February 10, 2012 ITAD BIR RULING NO. 049-12 Protocol of the Philippines-Japan tax treaty, as amended; BIR Ruling No. 13-95 Itochu Corporation-Manila Branch 16th Floor, 6788 Ayala Avenue Oledan Square, Makati City Attention: Kenichi Hisatomi General Manager Gentlemen : This refers to your tax treaty relief application (TTRA) filed on June 07, 2011, on behalf of ITOCHU CORPORATION ("Itochu-Japan"), requesting confirmation that the profits to be remitted by your company, ITOCHU CORPORATION-MANILA BRANCH ("Itochu-Phil."), to Itochu-Japan are subject to income tax at the rate of 10 percent pursuant to 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"). It is represented that Itochu-Japan, with address at 1-3, Kyuutaro-machi, 4-chome, Chuo-ku, Osaka-shi, Osaka-fu, Japan, is a corporation duly organized and existing under the laws of and is a resident of Japan within the meaning of the Philippines-Japan tax treaty as certified by the District Director of Higashi Tax Office on June 9, 2011; that Itochu-Phil. is a duly registered branch of Itochu-Japan in the Philippines under Amended SEC License No. F-507 dated May 20, 1997, with office located at the 16th Floor, 6788 Ayala Avenue, Oledan Square, Makati City 1226; and that Itochu-Japan has instructed Itochu-Phil. to remit to Itochu-Japan branch profits in the amount of Four Hundred Seven Thousand Nine Hundred Sixty-Eight and 25/100 US Dollars (US$407,968.25) by June 24, 2011. It is finally represented based on the Certification of the General Manager of Itochu-Phil. dated June 10, 2011, that the branch profits subject of the herein TTRA are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 of the National Internal Revenue Code (NIRC) of 1997 provides as follows, viz.: IAETSC "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. xxx xxx xxx." However, any income derived in the Philippines may be exempt from income tax (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) as required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the NIRC of 1997, as amended, provides: "SEC. 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." With respect to a treaty, the Protocol of the Philippines-Japan tax treaty, as amended, which you invoked may apply to the instant case. It provides: TaCIDS "PROTOCOL xxx xxx xxx 5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 percent of the amount of the part of such earnings which is remitted abroad. For the purposes of this paragraph, the term 'earnings' means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines. xxx xxx xxx (Emphasis supplied)" Under Article 5 of the said treaty, the term "permanent establishment" includes a branch, to wit: "Article 5 (1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. (2) The term 'permanent establishment' includes especially: (a) a store or other sales outlet; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a warehouse; (g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx (Emphasis supplied)" In view of the above provisions, Itochu-Phil., being a branch of Itochu-Japan, qualifies to avail of the 10 percent preferential tax rate. The branch profit remittance tax, which is an additional tax imposed upon Itochu-Phil., should not exceed 10 percent of such net income or earnings remitted to its head office, Itochu-Japan. Such being the case, the 15 percent tax rate prescribed under Section 28 (A) (5) of the NIRC of 1997 shall not apply to Itochu-Phil. Instead, the preferential tax rate of 10 percent under the Philippines-Japan tax treaty, as amended, shall be imposed. (BIR Ruling No. 013-95 dated January 30, 1995; Bank of Tokyo-Mitsubishi, Ltd.-Manila Branch vs. Commissioner of Internal Revenue, C.T.A. Case No. 5697, July 26, 2000) This ruling is issued on the basis of the facts as represented. If upon investigation it shall be disclosed that the 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