ITAD BIR Ruling No. 070-12

February 16, 2012 ITAD BIR RULING NO. 070-12 Article 11, Philippines-Japan Tax Treaty, as amended; BIR Ruling No. ITAD 05-99; BIR Ruling No. ITAD 06-99; BIR Ruling No. ITAD 005-00 Yumex Philippines Corporation First Cavite Industrial Estate Bo. Langkaan 4126 Dasmarias, Cavite Attention: Mr. Keisuke Tanaka General Manager Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 25, 2007, on behalf of Yumex Company Ltd. ("Yumex Ltd.") requesting confirmation that the interest paid by Yumex Philippines Corporation ("Yumex Phils.") is subject to preferential tax rate 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"). It is represented that Yumex Ltd. is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan for income tax purposes having its principal address at 531 Dai Kumagaya-shi, Saitama, Japan as evidenced by a Certificate of Residence for the Purpose of Claiming Benefit under the Japan/Philippines DTA for Interest issued by the District Director Kumagaya Tax Office; that Yumex Ltd. is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on July 15, 2005; and that Yumex Phils., on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal address located at First Cavite Industrial Estate, Bo. Langkaan 4126, Dasmarias, Cavite. It is further represented that Yumex Ltd. is a stockholder on record of Yumex Phils. with 192,199 subscribed common shares with value amounting to Php19,219,900.00 per certification dated July 15, 2005; that the subscribed capital of Yumex Ltd. from Yumex Phils. has been paid via conversion of liability of the latter to equity as evidenced by the Secretary's Certificate of Yumex Phils.; that Yumex Ltd. remitted/provided cash advances and/or open account purchases on raw materials for the production requirements as well as machines and equipment for ownership and for the use of Yumex Phil. from October 15, 1997 up to September 01, 1999. cAaETS It is further represented that on November 15, 2004, Yumex Ltd. and Yumex Phil. entered into a Contract of Quasi-Consumption Loan (hereinafter referred to as Loan Contract); that as of November 01, 2004, that the standing overdue credits of Yumex Phils. to Yumex Ltd. amounted to Three Million Four Hundred Eighty-Eight Thousand One Hundred Sixty-Nine US Dollars and Eighty-Six Cents Only (US$3,488,169.86) broken down as follows: Account Receivable (Overdue) US$2,485,178.26 Accounts uncollected (Overdue) Sales charges US$632,663.53 Cost Equipment US$267,369.26 Despatch & Delivery US$77,471.73 Others US$105,487.08 Collected but not appropriated (US$80,000.00) Total US$3,488,169.86 ============ that on November 17, 2004, Yumex Phils. and Yumex Ltd. entered in to a Memorandum with regard to the Loan Contract, that the relevant deduction was made and corrected on the amount of receivable of Yumex Ltd. from Yumex Phils. as of November 01, 2004, the standing overdue credit as follows: Account Receivable (Overdue) US$2,130,272.60 Accounts uncollected (Overdue) Sales charges US$632,663.53 Cost Equipment US$267,369.26 Despatch & Delivery US$77,471.73 Others US$105,487.08 Collected but not appropriated (US$80,000.00) Total US$3,133,264.20 ============ that both parties agreed on the computation of interest at 0.5% per annum (computation of daily rate based on 365 days) and the overdue penalty is 4.5% per annum (computing of daily rate based on 365 days). It is finally represented, based on the Certification issued by Yumex Ltd. on May 5, 2009, that the transaction subject of the request for 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 of the taxpayer/s involved. DaAIHC 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. aEIcHA 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 also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down 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, this Office hereby DENIES relief on the interest paid by Yumex Phils. to Yumex Ltd. before the subject TTRA was filed on July 25, 2007 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said interest shall be subject to income tax at the rate provided 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. . . . (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%)." (Emphasis supplied) CIDaTc However, all interest accruing before January 1, 2009, and payable after 15 days from the date of the filing of the TTRA on July 25, 2007 are hereby GRANTED relief and the same shall be subject to income tax at a reduced rate of 15 percent of the gross amount thereof pursuant to paragraph 2 (b), Article 11 of the Philippines-Japan tax treaty. As to the interest accruing from January 1, 2009, the same shall be subject to a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. It provides as follows: "Article 11 Paragraphs 2, 3, 4, 5, 6, 7 and 8 of Article 11 of the Convention shall be deleted and replaced by the following: "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. 1 xxx xxx xxx 5. 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. . . . (Emphasis ours)" Moreover, the Loan Agreement between Yumex Ltd. and Yumex Phil. dated November 15, 2004 is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997. 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. Prior to the effectivity of the Protocol amending the Philippines-Japan tax treaty the interest is 15 percent.