ITAD BIR Ruling No. 057-12

February 15, 2012 ITAD BIR RULING NO. 057-12 Article 4 of the Protocol to the Philippines-Spain tax treaty Indra Sistemas S.A. Philippine Branch 11th Floor, Cyber One Tower 11 Eastwood Avenue, Eastwood City Cyberpark Bagumbayan, Quezon City Attention: Maria Do Carmo Vidoeira Resident Agent Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 22, 2009 requesting confirmation that branch profits remitted by Indra Sistemas S.A. Philippine Branch ("Indra Sistemas Philippine Branch") to its head office in Spain are subject to income tax at the rate of 10 percent, pursuant to the Convention between the Republic of the Philippines and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Spain tax treaty"). Facts Indra Sistemas Philippine Branch is the branch office in the Philippines of Indra Sistemas S.A. ("Indra Sistemas"), which is situated at the 11th Floor, Cyber One Tower, 11 Eastwood Avenue, Eastwood City Cyberpark, Bagumbayan, Quezon City, Philippines. Indra Sistemas is a foreign corporation organized and existing under the laws of Spain and is a resident thereof based on the Certificate issued by the Agencia Tributaria of Spain on November 10, 2009. Indra Sistemas is situated at Avda Bruselas 35, 28108 Alcobendas, Madrid, Spain. Indra Sistemas is licensed by the Securities and Exchange Commission ("SEC") to establish a branch office in the Philippines under the License to Transact Business in the Philippines it issued on March 4, 2008, and under Company Registration No. FS200803090. Indra Sistemas is licensed to do business under the name and style of Indra Technology Systems to engage in the design, development, production, integration, commercialization, operation, installation and maintenance of systems solutions and products which use computing, electronic, communications and other information technologies (including the elements and mechanic devices related to them and the works required for installation) and are suitable to be applied to any field or sector, as well as any kind of service related thereto, among others. To date, Indra Sistemas has not filed any petition to withdraw or cancel its license, based on the Certificate of Corporate Filing/Information issued by the SEC on December 18, 2009. HIAEaC Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), 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 at least 15 days before the intended transaction or payment of income, to wit: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: 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. . ." (Emphasis ours) This condition was 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. IaSCTE 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 was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, this requirement in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, since Indra Sistemas Philippine Branch has been licensed to engage in business in the Philippines since March 4, 2008, but the subject TTRA was filed only on December 22, 2009, this Office hereby DENIES relief on branch profits remitted by Indra Sistemas Philippine Branch to Indra Sistemas before the fifteenth day following the date of filing of the TTRA, or on January 6, 2010, pursuant to Section III (2) of RMO 1-2000. Accordingly, said branch profits shall be subject to income tax at the rate of 15 percent under Section 28 (A) (5) of the National Internal Revenue Code of 1997, as amended, to wit: "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 (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 remuneration for technical services, salaries, wages premiums, 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." aDHCAE On the other hand, branch profits remitted by Indra Sistemas Philippine Branch to Indra Sistemas on January 6, 2010 and thereafter shall be subject to income tax at the rate of 10 percent under Article 4 of the Protocol to the Philippines-Spain tax treaty, to wit: "Article 4 With reference to paragraph 5 of Article 10, nothing in this Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operations of ships or aircraft in international traffic) of a company being a resident of Spain 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 branch being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 per cent of the amount or the part of such earnings which is remitted abroad." 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