ITAD BIR Ruling No. 071-12

February 16, 2012 ITAD BIR RULING NO. 071-12 Article 11, Philippines-Netherlands tax treaty Nisce Mamuric Guinto Rivera and Alcantara Unit 804, 139 Corporate Center 139 Valero St., Salcedo Village Makati Attention: Albert D. Altura Cornelio V. Caedo Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 21, 2010, requesting on behalf of SKI Energy Resources, Inc. ("SERI"), requesting confirmation that the interests due on the Loan Facility Agreement made by Merton Investments NL BV ("MIN'') to SERI, are subject to the 15 percent preferential tax rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that MIN, with principal office address at Hemonystraat 11 1074 BK Amsterdam, is a corporation organized and existing under the laws of The Netherlands and is a resident thereof within the meaning of Article 4 of the Philippines-Netherlands tax treaty as evidenced by the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated May 18, 2010; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 27, 2010; and that, on the other hand, SERI is a corporation duly organized and existing under the laws of the Philippines with principal office address at 17th Floor, Philamlife Tower, 8767 Paseo de Roxas, Makati. It is also represented that on November 4, 2009, MIN and SERI entered into a Loan Facility Agreement ("Agreement"), with the following terms: a. MIN grants SERI a US$15,000,000 Loan Facility Agreement to fund the latter's requirements for certain capital expenditure in respect of their Naga and Danao coal operating concessions; b. MIN will make each Advance 1 available to SERI during the Availability Period, 2 provided that: EACIaT b.1. MIN receives from SERI, not later than 11:00 am, five (5) business days before each Advance Date, 3 a Notice of Drawing for an Advance, the amount of which shall not be more than the amount of the Facility then remaining undrawn and which shall be a minimum and equal to or a multiple of US$1,000,000; b.2. No Event of Default or Potential Default has occurred on the date of the relevant Notice of the Drawing and on the Advance Date; b.3. The Repeating Representations to be made by SERI are true and correct on the date of the relevant Notice of the Drawing and on the Advance Date; b.4. No material disruption to any payment or communications systems or financial markets which systems or markets are required to operate for the transactions under the Agreement to be carried out preventing SERI from performing its payment obligations under the Agreement, in any such case, outside of the control of SERI or MIN, has occurred. c. An interest of 25% per annum will accrue on each Advance from day to day and will be calculated by reference to the number of days elapsed and a 360-day year, d. SERI shall repay the loan 4 and pay all other obligations in full on the Maturity Date. 5 e. In case of default on the part of SERI to pay the principal, interest or other amounts on their due date, interest will accrue and be payable by SERI on the overdue amount from the due date until payment in full at the per annum rate certified by MIN to be 2% above the rate of 25%. f. The first payment of interest accrued on the loan shall be paid in arrears on the anniversary of the first Advance Date. Thereafter interest shall be paid at 6 monthly intervals with a final payment on the Maturity Date. and that, as proof of inward remittance, MIN presented a Certified true Copy of Allied Banking Corporation Foreign Remittance System-Report of Transactions dated December 2, 2009 showing that SERI received an inward remittance in the amount of: a) US$1,499,965.00 and b) US$999,965.00, or a total of US$2,249,930. * IcHTED It is finally represented that the issue or transaction subject of the application for tax treaty relief is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal, as confirmed by SERI in its certification dated July 15, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, applies, in general, to interest received by a nonresident foreign corporation. It provides: "Section 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 . . ., interest, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, 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" Thus, Article 11 of the Philippines-Netherlands tax treaty, which you have invoked, may apply to your instant request for relief. It provides: SEDIaH "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 percent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 percent of the gross amount of the interest in all other cases. xxx xxx xxx 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. . . ." Based on the aforequoted provisions, interest, which is supposed to not include penalty charges from late payments, arising in the Philippines and paid to a resident of Netherlands may be subject to a Philippine tax at a rate not to exceed 10 percent of the gross amount of the interest provided that such interest is paid in connection with: a.) the sale of any industrial, commercial or scientific equipment, b.) loans granted by banks or any other financial institutions, or c.) in respect of public issues of bonds, debentures or similar obligations. In all other cases, the rate of 15 percent of the gross amount of the interest shall apply. cHESAD 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) 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). ACaDTH In view of the foregoing, this Office hereby DENIES relief on the interests paid by MIN to SERI before the subject TTRA was filed on July 21, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said fees shall be subject to income tax at 30 percent as provided for under Section 28 (B) (1) of the Tax Code of 1997 cited above. On the other hand, since SERI's interest payments are neither in respect of the sale of industrial, commercial or scientific equipment nor is it granted by a bank nor in respect of public issues of bonds, debentures or similar obligations, this Office hereby GRANTS relief on the interest payments by SERI to MIN under the Agreement made after 15 days from the filing of the TTRA on July 21, 2010, with the exception of any interest paid in the nature of penalty for late payments, and are subject to the preferential tax rate of 15 percent of the gross amount of interests, pursuant to Article 11 (2) (b) of the Philippines-Netherlands tax treaty. However, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. 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. "Advance" means the drawing of principal under the Facility. 2. "Availability Period" means a period commencing on the date of the Agreement, November 4, 2009, and ending on the day falling 30 days prior to the Maturity Date. 3. "Advance Date" means the Business Day on which an Advance is made, or, as the context requires, on which it is proposed an Advance be made, available to SERI. 4. "Loan" means the aggregate principal amount advanced by MIN under the Facility or, as the context requires, the outstanding balance thereof. 5. "Maturity Date" means the day falling 3 years after the first Advance Date.