ITAD BIR Ruling No. 072-13

March 15, 2013 ITAD BIR RULING NO. 072-13 Article 11, Philippines-Japan tax treaty, as amended Azbil Philippines Corporation 5F Gloria Bldg.,109 Aguirre St., Legaspi Village, Makati City 1229 Attention: Takaaki Kawamura President and Managing Director Gentlemen : This refers to your tax treaty relief application filed on April 27, 2010, on behalf of Yamatake Corporation ("YC") ,requesting confirmation that the interests due on the loans made by YC to its subsidiary company in the Philippines, Azbil Philippines Corporation 1 ("Azbil") ,are subject to the 10 percent preferential tax rate pursuant to the amended 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 2 ("Philippine-Japan tax treaty, as amended") . Facts It is represented that YC is a corporation organized and existing under the laws of Japan with principal office address at 2-7-3 Marunouchi, Chiyoda-ku, Tokyo, Japan, as evidenced by its Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated March 26, 2010; and that, on the other hand, Azbil is a wholly-owned subsidiary of YC and is a corporation duly organized and existing under the laws of the Philippines with office address at 5F Gloria Bldg.,109 Aguirre St.,Legaspi Village, Makati. It is also represented that YC and Azbil entered into three (3) Loan Agreements 3 (" Agreements "): 1. On November 16, 1997, in which YC extended Azbil: (a.) US$25,000 working fund subject to 6.42901% per annum interest rate, with November 17, 1997 as drawdown date and February 19, 1998 as maturity date; (b.) US$50,000 working fund subject to 6.42901% per annum interest rate, with November 19, 1997 as drawdown date and February 19, 1998 as maturity date; (c.) JPY9,000,000 working fund subject to of 0.79714% per annum interest rate, with November 19, 1997 as drawdown date and February 19, 1998 as maturity date; HCITcA 2. On June 16, 2000, in which YC extended Azbil: (a.) JPY6,000,000 working fund to Azbil, subject to 0.51857% per annum interest rate, with June 20, 2000 as drawdown date and September 20, 2000 as maturity date; (b.) US$9,090 working fund to Azbil, subject to 6.975% per annum interest rate, with June 20, 2000 as drawdown date and September 20, 2000 as maturity date; and; 3. On June 6, 2006, in which YC extended to Azbil: (a.) JPY35,000,000 working fund to Azbil, subject to 0.79091% per annum an interest rate, with June 8, 2006 as drawdown date and September 8, 2006 as maturity date; And that, as proof of inward remittance, Azbil presented a Certificate of Inward Remittance dated November 18, 2010 from the Bank of Tokyo-Mitsubishi UFJ-Manila Branch, showing that Azbil received an inward remittance in the amount of: a.) US$50,000 and JPY9,000,000 posted on November 19, 1997; b.) US$9,090 posted in June 20, 2000; and, c.) JPY6,000,000 posted on June 20, 2000; as well as Certification dated November 23, 2010 from the Mizuho Corporate Bank, Ltd.-Manila Branch, showing that Azbil received an inward remittance in the amount of a.) US$25,000 posted in November 17, 1997; and, b.) JPY35,000,000 posted on June 8, 2006. Moreover, it is represented that the Agreements were renewed yearly due to the inability of Azbil to pay the amounts due on the aforementioned Agreements; and that on December 21, 2009, a Memorandum was executed by Azbil and YC wherein the maturity date of the Agreements were extended to December 26, 2010 and the interest rates 4 were accordingly adjusted to: a.) LIBOR 5 plus 0.5% per annum as of two banking days before the anniversary date, for every three months from each Latest Maturity Date of Interest for the loans in US Dollars; and, b.) TIBOR 6 plus 0.5% per annum as of two banking days before the anniversary date, for every three months from each Latest Maturity Date of Interest for the loans in Japanese Yen. It is further 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 Azbil in its certification dated May 26, 2010. Finally, as proof of payment of interests made after the filing of the herein TTRA on April 27, 2010 and thereafter, a Certification issued by Mizuho Corporate Bank Ltd.-Manila Branch on June 15, 2012 was submitted showing, in detail, the outward payments of Azbil to YC by way of Telegraphic Transfer, as follows: HCTaAS Debited from their US Dollar Savings Account: Date Bank Reference No. Amount in USD 06-29-10 OTT-789-629029 116,375.07 09-30-10 OTT-789-930041 108,517.42 12-30-10 OTT-789-280002 76,016.43 03-31-11 OTT-789-331003 110,874.21 06-30-11 OTT-789-630004 70,936.25 09-30-11 OTT-789-930002 102,713.63 12-29-11 OTT-789-279002 133,770.80 03-30-12 OTT-789-330002 127,431.19 Debited from their Yen Savings Account: Date Bank Reference No. Amount in JPY 06-29-10 OTT-789-629028 141,017 09-30-10 OTT-789-930042 135,449 12-30-10 OTT-789-280003 97,547 03-31-11 OTT-789-331002 121,021 06-30-11 OTT-789-630003 94,241 09-30-11 OTT-789-930001 95,277 12-29-11 OTT-789-279004 2,061,854 03-30-12 OTT-789-330003 315,841 In reply, please be informed that interests derived in the Philippines by a nonresident foreign corporation are generally subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (F) 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, Section 32 (B) (5) of the same Tax Code provides as follows, to wit: ASTcEa "SEC. 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: 7 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." In relation thereto, Article 11 the Philippines-Japan tax treaty, as amended, may apply to the instant case. It provides: "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. 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 percent 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: DHcSIT 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. 5. The provisions of paragraphs 1 and 2 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political subdivision or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. DTEcSa 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to a Philippine tax at a rate not to exceed 10 percent of the gross amount of the interest if paid in respect of government securities, bonds, or debentures, and in all other cases, 15 percent of the gross amount of the interest for payments made prior to January 1, 2009, and 10 percent of the gross amount of interest beginning January 1, 2009. 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: ICcaST 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 ... " (Underscoring 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. " (Underscoring ours) CSDAIa 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 payments of Azbil to YC under the Agreements, made before May 12, 2010 8 pursuant to RMO 1-2000. Accordingly, said interests shall be subject to income tax at the rate of 20 percent pursuant to the above-cited Section 28 (B) (5) (a) of the Tax Code of 1997, as amended. However, since the interest payments are not in respect of government securities, bonds or debentures, this Office hereby GRANTS relief on the interest payments of Azbil to YC under the Agreements from May 12, 2010 and thereafter. Accordingly, the interest payments are subject to tax at a reduced rate of 10 percent based on the gross amount thereof, pursuant to the Article 11 of the Philippines-Japan tax treaty, as amended. However, the Loan Agreements 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. Azbil Philippines Corporation was initially incorporated as Yamatake-Honeywell Philippines, Inc. It later changed its name to Yamatake Philippines, Inc. as evidenced by Certificate of Filing of Amended Articles of Incorporation issued by the SEC dated October 23, 1997. After which, it again changed its name to Azbil Philippines Corporation as shown in the Certificate of Filing of Amended Articles of Incorporation issued by the SEC dated March 12, 2009. 2. The Protocol amending the Philippines-Japan tax treaty took effect on January 09, 2009. 3. The interest in all Agreements is due and payable on the Maturity Date in one lump sum to be computed on a basis of 360 days to a year and for the actual number of days that elapsed. 4. The interest rates shall accrue and be payable on every three months in lump sum which shall be computed for the actual number of days elapsed and on the basis of 360 days to a year. 5. LIBOR means London Interbank Offered Rate. 6. TIBOR means Tokyo Interbank Offered Rate. 7. TITLE II TAX ON INCOME. 8. May 12, 2010 is the 15th day from date of filing of the TTRA on April 27, 2010.