ITAD BIR Ruling No. 068-12

February 16, 2012 ITAD BIR RULING NO. 068-12 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Antonette C. Tionko Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on April 9, 2009 requesting confirmation that service fees paid by Quezon Power (Philippines) Ltd.,Co. ("Quezon Power") to P.A.R. Alloy, Inc. ("P.A.R. Alloy") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income. Facts P.A.R. Alloy is a corporation organized and existing under the laws of the United States, based on its Articles of Incorporation filed at the Office of the Secretary of State of Colorado in the United States on October 1, 1969. P.A.R. Alloy is situated at 10901 West Toller Drive, Suite 201, Littleton, Colorado, United States. P.A.R. Alloy is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission ("SEC") on October 22, 2008. On the other hand, Quezon Power is a domestic partnership based on its Articles of Partnership approved by the SEC on November 19, 1996 and on October 3, 1997. Quezon Power is situated at 62 H. dela Costa, Barangay Daungan, Mauban, Quezon, Philippines. ESIcaC On January 3, 2005, Quezon Power (through Covanta Philippines Operating, Inc. ("Covanta"), a corporation organized and existing under the laws of the Cayman Islands) and P.A.R. Alloy entered into a Service Contract Agreement where P.A.R. Alloy agreed to grit-blast the two electrostatic precipitator boxes located at Quezon Power 's power plant in Mauban, Quezon, Philippines. The work will commence on April 9, 2005 and will be completed in seven days, and will employ two crews of P.A.R. Alloy working in shifts for 22 hours every day. In consideration, Quezon Power will pay service fees to P.A.R. Alloy amounting to US$1,004,756.00, to be paid in installments: US$254,756.00 in 2005 and US$250,000.00 in 2006, 2007 and 2008. The Agreement was in effect from January 1, 2005 to December 31, 2008. On May 8, 2006, Quezon Power (through Covanta) and P.A.R. Alloy entered into another Service Contract Agreement where P.A.R. Alloy agreed to remove and replace the three roll assemblies and the six plunger can assemblies in the foster wheeler of the coal pulverizer located at the same power plant. The work will commence on June 3, 2006 and will be completed in ten days, and will employ one crew of P.A.R. Alloy working every day. In consideration, Quezon Power will pay service fees to P.A.R. Alloy amounting to US$131,585.00. The second Agreement was in effect from April 21 to June 15, 2006. Furthermore, Quezon Power (through Covanta) engaged the services of P.A.R. Alloy for the following works and Quezon Power (through Covanta) paid service fees therefor: Purchase Date of Purchase Scope of Work Order No. Order and Service Fees Payment 1. Supervision and supply of CPO10603158 March 16, 2006 US$250,000.00 manpower, tools, equipment, and consumable materials on the sandblasting of an electrostatic precipitator. 2. Supervision and supply of CPO10603105 March 22, 2006 US$140,350.00 manpower, tools, and equipment on the replacement of a pulverizer roller and on the installation of a plunger can for the pulverizer. 3. Supervision and supply of CPO10604235 May 9, 2006 US$131,585.00 manpower, tools, and equipment on the replacement of a pulverizer roller and on the installation of a plunger can for the pulverizer. 4. Supply of manpower, tools, CPO10606250 June 22, 2006 US$16,583.00 and equipment on the inspection of a fire and process distillate and a condensate tank. 5. Supervision and supply of CPO10610161 October 16, 2006 US$283,274.00 manpower, tools, equipment, and consumable materials on the sandblasting of an electrostatic precipitator. 6. Supervision and supply of CPO10612153 December 14, US$421,050.00 manpower, tools, and 2006 equipment on the replacement of three pulverizer rollers and on the installation of plunger cans in these pulverizers. 7. Supply, installation, and CPO10702250 March 1, 2007 US$226,800.00 commissioning of a primary air isolation. 8. Supervision and supply of CPO10703125 March 9, 2007 US$250,000.00 manpower, tools, equipment, and consumable materials on the sandblasting of an electrostatic precipitator. 9. Installation of test ports to CPO10703217 April 24, 2007 US$6,000.00 test and commission a fan isolation damper. 10. Inspection of feedwater flow CPO10705141 May 8, 2007 US$6,240.00 element and de-superheater spray flow element. 11. Grit-blasting of closed CPO10707102 July 12, 2007 US$2,260.00 cooling seawater piping. 12. Supervision and supply of CPO10707248 September 13, US$114,637.00 manpower, tools and 2007 equipment, and consumable materials on the fabrication, manufacturing, installation and commissioning of a turbine lube oil storage tank. Based on the Certifications issued by the Vice President of Covanta on March 9, 2009 and February 4, 2011, P.A.R. Alloy performed services in Philippines for 7 days in 2005, 43 days in 2006, 32 days in 2007, and 89 days in 2008. 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, thus: "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. 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) CacEID This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the 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. EB 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 the services covered by the first and second Service Contract Agreements and the subsequent Purchase Orders were all rendered in the Philippines by P.A.R. Alloy in 2005, 2006, 2007 and 2008, and service fees therefor were paid also by Quezon Power (through Covanta) to P.A.R. Alloy in those years, but since the subject TTRA was filed on April 9, 2009, this Office hereby DENIES relief on such fees for having the TTRA filed beyond the fifteen-day period prescribed in RMO 1-2000. Accordingly, said fees shall be subject to income tax at the rate of 35 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: "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%)." Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue