ITAD BIR Ruling No. 053-13

March 8, 2013 ITAD BIR RULING NO. 053-13 Articles 5, 7 & 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 115-11; BIR Ruling No. ITAD 167-11; BIR Ruling No. ITAD 120-11 Tsuneishi Heavy Industries (Cebu), Inc. West Cebu Industrial Park, SEZ, Buanoy, Balamban, Cebu Attention: Joseph Y. Tugonon and Benita Paculba Authorized Representatives Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 28 April 2010 requesting confirmation that interest income earned by Chugoku Bank, Ltd., Bank of Tokyo-MUFJ, Hiroshima Bank, Ltd. , and Sumitomo Banking Corporation from an Installment Loan Agreement in favor of Tsuneishi Heavy Industries (Cebu), Inc. is subject to the preferential tax treaty rate of 10 percent pursuant to the 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) . The facts, as represented, are as follows: Tsuneishi Heavy Industries (Cebu), Inc. ("Tsuneishi-Cebu") is a domestic corporation organized under the laws of the Philippines based on a Certified True Copy of its Articles of Incorporation from the Securities and Exchange Commission. It is registered with the Bureau of Internal Revenue as a company engaged in the manufacture of builder's carpentry, joinery, millworking and building and repair of ships with address at West Cebu Industrial Park-SEZ, Buanoy, Balamban, Cebu 6401 based on a Certificate of Registration issued by BIR LTDO-Cebu. It is also a PEZA-registered Ecozone Export Enterprise with Registration Certificate No. 98-055 dated 16 September 1998 based on Certification No. 2010-1047 issued by the Philippine Economic Zone Authority. Mr. Joseph Y. Tugonon and/or Ms. Benita Paculba are the authorized representatives of Tsuneishi-Cebu for the purpose of securing this ruling relative to the Loan Agreement entered into with non-resident foreign lender-banks based on the notarized Authorization executed by the Assistant Corporate Secretary of the company on 28 January 2011. On 30 March 2009, an Installment Loan Agreement for the amount of Four Hundred Billion Japanese Yen (JP4,000,000,000.00) n was entered into among the entities described below in their respective capacities: aTDcAH Entity Capacity Tsuneishi-Cebu Borrower Tsuneishi-Holdings Corporation Guarantor The Chugoku Bank, Ltd. and Bank of Tokyo-MUFJ Joint Arrangers The Chugoku Bank, Ltd. Security Agent Bank of Tokyo-MUFJ Paying Agent The Chugoku Bank, Ltd., The Bank of Tokyo- Lenders MUFJ, Hiroshima Bank, Ltd., Sumitomo Banking Corporation Tsuneishi-Holdings Corporation ("Tsuneishi-Japan") is a non-resident foreign corporation and a resident of Japan for tax purposes, with principal address at 1083, Tsuneishi, Numakuma-cho, Numakuma-gun, Hiroshima, based on a consularized and notarized Fukuyama Tax Office Certificate of Status of Taxable Person. It is not registered as a corporation or partnership on the Philippines based on a Certificate of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) on 25 August 2009. Tsuneishi-Japan is the guarantor of Tsuneishi-Cebu in relation to the Installment Loan based on a consularized and notarized Commission Agreement between the two companies. Chugoku Bank Ltd. is non-resident foreign corporation and a resident of Japan for tax purposes with principal address at 15-20, Marunouchi 1-chome, Kita-ku, Okayama-shi, Okayama based on a consularized and notarized Certificate of Status of Taxable Person issued by the Okayamahigashi Tax Office on 13 October 2009. It is not registered as a corporation or partnership in the Philippines based on a Certificate of Non-Registration of Corporation/Partnership issued by the SEC on 19 May 2009. Bank of Tokyo-Mitsubishi UFJ ("Bank of Tokyo-MUFJ") is a non-resident foreign corporation and a resident of Japan for tax purposes with principal office address at 7-1, Marunouchi, 2-chome, Chiyoda-ku, based on a consularized and notarized Certificate of Residence issued by the Kojimachi Tax Office on 23 October 2009. It is not registered as a corporation or partnership in the Philippines based on a Certification of Non-Registration of Corporation/Partnership issued by the SEC on 18 May 2009. Hiroshima Bank, Ltd. is a non-resident foreign corporation and a resident of Japan for tax purposes with principal address at 3-8, Kamiya-cho, 1-chome, Naka-ku, Hiroshima-shi, Hiroshima based on a consularized and notarized Certificate of Status of Taxable Person issued by the Hiroshima-Higashi Tax Office on 22 October 2009. It is not registered as a corporation or partnership in the Philippines based on a Certificate of Non-Registration of Company issued by the SEC on 06 August 2010. Sumitomo Mitsui Banking Corporation is a non-resident foreign corporation and a resident of Japan for tax purposes with principal address at 1-2, Yurakusho, 1-chome, Chiyoda-ku, Tokyo based on a consularized and notarized Certification of Country of Residence issued by the Kojimachi Tax Office on 16 November 2009. Sumitomo Mitsui Banking Corporation-Manila is the Philippine representative office of Sumitomo Mitsui Banking Corporation and a resident of Japan for tax treaty purposes. In a Certification executed on 30 January 2012, Sumitomo Mitsui Banking Corporation-Manila expressed that it is not a party to the Installment Loan Agreement. CcaASE An arrangement fee of JP42,000,000 shall be paid to Chugoku Bank Ltd. and Bank of Tokyo-MUFJ as Joint Arrangers on the signing date of the Installment Loan Agreement and an agent fee of JP1,500,000 per annum shall be paid to the Joint Arrangers for as long as any amounts are outstanding under the Installment Loan Agreement based on the Fee Letter addressed to Tsuneishi-Cebu. The loan shall be payable in ten (10) equal installments detailed as follows: Installment Number Repayment Date Repayment Amount of Principal in JP 1 20 December 2011 400,000,000 2 20 June 2012 400,000,000 3 20 December 2012 400,000,000 4 20 June 2013 400,000,000 5 20 December 2013 400,000,000 6 20 June 2014 400,000,000 7 20 December 2014 400,000,000 8 20 June 2015 400,000,000 9 20 December 2015 400,000,000 10 20 June 2016 400,000,000 Total 4,000,000,000 ============ In accordance with the Fee Letter, the Fees (arrangement fee and agent fee) shall be payable as follows: Type of Fee Date of Payment Distribution of Fees Arrangement Fee 30 March 2009 (date of signing of Loan Agreement) 42,000,000 = 25,200,000 (Chugoku Bank, Ltd.) + 16,800,000 (Bank of Tokyo-MUFJ) Agent Fee 30 March 2009 (date of signing of Loan Agreement) 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2010 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2011 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2012 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2013 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2014 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) 30 June 2015 1,500,000 = 750,000 (Chugoku Bank, Ltd.) + 750,000 (Bank of Tokyo-MUFJ) Total 52,500,000 Based on the Installment Loan Agreement 1 notarized in the Philippines, Tsuneishi-Cebu shall pay the total amount of interest calculated by multiplying the outstanding principal amount in the relevant Interest Calculation Period 2 of the Individual Installment Loans 3 of each lender related to such Interest Calculation Period by (i) the Applicable Interest Rate (= Base Rate 4 + Spread 5 ) for the relevant Interest Calculation Period and (ii) the actual number of days of such Interest Calculation Period. Interest shall be calculated on a per diem basis, inclusive of the first day and exclusive of the last day, assuming that there are 365 days a year, wherein divisions shall be done at the end of the calculation and fractions less than one yen shall be rounded down. 6 cHDaEI The interest subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Secretary's Certificate issued by the Assistant Corporate Secretary of Tsuneishi-Cebu on 27 April 2010. In a Letter dated 23 August 2010, Tsuneishi-Cebu represents that consularization and notarization of the Installment Loan Agreement would cost the company P1,000,000.00 and that "the Agreement as signed by the duly authorized representatives of the lenders and the guarantor, governs the understanding by the parties with regard to the loan obtained by the Borrower from the Lenders, and all the parties thereto have expressly affirmed that such Agreement shall be valid, binding and enforceable in accordance with the terms and conditions thereof." 7 On 12 October 2010, Bank of Tokyo-Mitsubishi MUFJ issued a Certification informing Tsuneishi-Cebu concerning Proof of Inward Remittance to the effect that it received a total of JP4,000,000,000.00 from the lenders in this order: Lender/Sender Date Received Amount Received in JP The Bank of Tokyo-Mitsubishi UFJ, Ltd. 22 June 2009 375,000,000 The Chugoku Bank, Ltd. 22 June 2009 562,500,000 The Hiroshima Bank, Ltd. 22 June 2009 281,250,000 Sumitomo Mitsui Banking Corp. 22 June 2009 281,250,000 The Bank of Tokyo-Mitsubishi UFJ, Ltd. 24 September 2009 375,000,000 The Chugoku Bank, Ltd. 24 September 2009 562,500,000 The Hiroshima Bank, Ltd. 24 September 2009 281,250,000 Sumitomo Mitsui Banking Corp. 24 September 2009 281,250,000 The Bank of Tokyo-Mitsubishi UFJ, Ltd. 21 December 2009 250,000,000 The Chugoku Bank, Ltd. 21 December 2009 375,000,000 The Hiroshima Bank, Ltd. 21 December 2009 187,500,000 Sumitomo Mitsui Banking Corp. 21 December 2009 187,500,000 Total 4,000,000,000 ============ 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 Application [TTRA] Pursuant to Existing Philippine Tax Treaties) ["RMO 72-2010"] , which covers income derived or which accrued on 04 November 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 first taxable event subject of the TTRA, 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. Transactions 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) Since your application for treaty relief was filed before 04 November 2010 or on 28 April 2010, it is governed by the provisions of the previous guidelines, Revenue Memorandum Order No. 1-2000, to the effect 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." aEIADT A. On Interest Payments Interest paid to Chugoku Bank, Ltd., Bank of Tokyo-MUFJ, Hiroshima Bank, Ltd. , and Sumitomo Banking Corporation , all foreign corporations not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent. Section 28 (B) (5) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) 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, such interest may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code of 1997, as amended, 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: 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. xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty. Paragraphs 1 to 4, Article 11, as amended by The Protocol Amending the 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 , thereof provide as follows: "Article 11 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. ADSTCI 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 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph (2), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: (a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; (b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx xxx xxx" Based on the above provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed ten percent (10%). The term interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. In this case, the TTRA was filed on 28 April 2010. Consequently, RMO No. 1-00 requires that "Any availment of the tax treaty relief shall be preceded by an application with ITAD at least fifteen (15) days before the transaction date" finds application. Hence, this Office is of the opinion that all interest payments made before 13 May 2010 8 will be subject to the regular rate of 20% while interest payments made on 13 May 2010 and thereafter is subject to the preferential tax rate of 10% pursuant to the tax treaty. This is because the interest arising from the Installment Loan Agreement is not in respect of government securities, bonds or debentures at hand, nor being paid to the Government of Japan, etc. (BIR RULING NO. ITAD-167-11 dated 07 June 2011 and BIR RULING NO. ITAD-115-11 dated 11 April 2011). CIaHDc B. On Fees Under tax treaties, payments for the supply of services are treated as business profits. Hence, the fees obtained by Chugoku Bank Ltd. and Bank of Tokyo-MUFJ, as in their capacity as joint arrangers of the Loan and agents, are business profits. Therefore, as business profits, the service fees may be taxed in the Philippines if Chugoku Bank, Ltd. and Bank of Tokyo-MUFJ each have a permanent establishment in the Philippines to which these fees may be attributed. Paragraph 1, Article 7 of the Philippines-Japan tax treaty provides: "Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." The term "permanent establishment" is defined in paragraphs 1, 2 and 6, Article 5 of the tax treaty as follows: "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 6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State." Under the above-quoted provisions, Chugoku Bank, Ltd. , and Bank of Tokyo-MUFJ, are deemed to each have a permanent establishment if they have a fixed place of business through which their businesses are wholly or partly carried on, such as, a store or other sales outlet, a branch, an office, a factory, a workshop, and a warehouse. Chugoku Bank, Ltd. , and Bank of Tokyo-MUFJ are also deemed to have a permanent establishment if they furnishes consultancy services in the Philippines (through employees or other personnel thereof) for a period or periods aggregating more than six months within any taxable year. Accordingly, since Chugoku Bank, Ltd. , and Bank of Tokyo-MUFJ are not engaged in trade or business in the Philippines, and since they did not provide consultancy services in the Philippines for a period more than an aggregate of six months within any taxable year, Chugoku Bank, Ltd. , and Bank of Tokyo-MUFJ are not deemed to each have a permanent establishment in the Philippines. Therefore, the arrangement and agent fees to be paid by Tsuneishi-Cebu to Chugoku Bank, Ltd. , and Bank of Tokyo-MUFJ under the Installment Loan Agreement in relation to the Fee Letter are exempt from income tax, pursuant to paragraph 1, Article 7, in relation to paragraphs 1, 2 and 6, Article 5, of the Philippines-Japan tax treaty. (BIR RULING ITAD No. 120-11 dated 11 April 2011) In this case, the TTRA was filed on 28 April 2010. Consequently, RMO No. 1-00 requires that "Any availment of the tax treaty relief shall be preceded by an application with ITAD at least fifteen (15) days before the transaction date" finds application. Hence, this office is of the opinion that all interest payments made before 13 May 2010 9 will be taxable while fees paid on 13 May 2010 and thereafter are exempt from income tax pursuant to paragraph 1, Article 7, in relation to paragraphs 1, 2 and 6, Article 5, of the Philippines-Japan tax treaty. acCDSH C. On Documentary Stamp Tax Finally, the Installment Loan Agreement , being a debt instrument, executed by Tsuneishi-Cebu in favor of Chugoku Bank, Ltd., Bank of Tokyo-MUFJ, Hiroshima Bank, Ltd., and Sumitomo Banking Corporation is subject to documentary stamp tax (DST) equivalent to P1.00 for every P200.00, or fractional part thereof, of the issue price or the amount subject of the Loan. Section 179 of the Tax Code, as amended, provides: "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 a fractional part thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five days, provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" Further, it is noteworthy to mention that PEZA-registered entities are entitled to the preferential tax rate of five percent (5%) in lieu of all taxes only insofar as its registered activities are concerned. Due to the failure of Tsuneishi -Cebu, a PEZA-registered entity, to submit a copy of its specific terms and conditions of its PEZA registration, this Office cannot ascertain whether or not the activity of entering into a loan agreement is considered as one of its registered activities. Hence, the Installment Loan Agreement is subject to DST. (BIR RULING NO. ITAD-167-11 dated 07 June 2011 and BIR RULING NO. ITAD-115-11 dated 11 April 2011). 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. Article 10, Interest, Installment Loan Agreement. 2. For each installment loan (or the Loan, if on and after the Installment Loan Integration Date), (a) the period commencing on the Drawdown Date of the relevant Installment Loan and ending on the first Interest Payment Date and (b) each subsequent period thereafter commencing on the last preceding Interest Payment Date and ending on the following Interest Payment Date. [par. 57, Article I, Definitions, Installment Loan Agreement]. 3. A loan made by each Lender on each Drawdown Date subject to its Lending Obligation. [par. 4, Article I, Definitions, Installment Loan Agreement]. 4. The six (6)-month (or, with respect to the Interest Calculation Period commencing on the Second Drawdown Date, three (3)-month) interest rate among the rates of JPY-TIBOR (appearing on the Telerate Page 17097) published by the Japanese Bankers Association at 11:00 a.m. or at the nearest possible time after 11:00 a.m. (Tokyo Time) on the day two (2) Business Days prior to the commencement date of the relevant Interest Calculation Period; provided, however, that, if such interest rate is not published for some reason, this shall be the interest rate (indicated as an annual rate) that is reasonably decided upon by the Paying Agent as the offered rate applicable to a drawdown in yen for a period of six (6) months (or, with respect to the Interest Calculation Period commencing on the Second Drawdown Date, three (3)-month) in the Tokyo Interbank market at 11:00 a.m. or at the nearest possible time prior to the commencement date of the relevant Interest Calculation Period. [par. 12, Article I, Definitions, Installment Loan Agreement]. 5. 0.80% per annum [par. 23, Article I, Definitions, Installment Loan Agreement]. 6. Article 10.2, Interest, Installment Loan Agreement. 7. Letter dated August 23, 2010 by Koshiro Suzuki, Finance Manager of Tsuneishi-Cebu. The letter was received by ITAD on 06 September 2010. 8. 13 May 2010 is the 15th day after the date of filing of the TTRA on 28 April 2010. 9. 13 May 2010 is the 15th day after the date of filing of the TTRA on 28 April 2010. n Note from the Publisher: Discrepancy between amount in words and in figures.