ITAD BIR Ruling No. 128-13

May 6, 2013 ITAD BIR RULING NO. 128-13 Team Energy Corporation CTC Building 2232 Roxas Boulevard Pasay City 1300 Philippines Attention: Mr. Kazunobu Takijima VP-Controller Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on January 10, 2008, on behalf of TRC ENVIRONMENTAL CORPORATION ("TRC", formerly Vast Research, Inc. ), requesting confirmation that the service fees paid by TEAM ENERGY CORPORATION ("TEC", formerly Mirant Pagbilao Corporation ) and by TEAM SUAL CORPORATION ("TSC", formerly Mirant Sual Corporation ) to TRC are not subject to Philippine income tax, pursuant to Article 8 (1) in relation to Article 5 of 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" ("Philippines-US tax treaty"). It is represented that TRC, a foreign corporation organized and existing under the laws of the State of Connecticut, United States of America per its Articles of Incorporation dated January 7, 1971, as amended on March 27, 1973, entered into several contracts with TEC and TSC, corporations organized and existing under the Philippine laws, both with registered address at CTC Bldg., 2232 Roxas Blvd., Pasay City, as follows: Date Contracting Contract Term of Service Fees Partner Contract 1. October 6, MIRANT Consultancy Contract for October 10, 2006 USD Thirty-Five 2006 PAGBILAO the Relative Accuracy up to October 15, 2006 Thousand Five CORPORATION, Test Audit (RATA) for Hundred and 00/100 now Team Energy Continuous Emission only ($35,500.00) Corporation Monitoring System of Units 1 & 2 (PO-45863) 2. August TEAM ENERGY Contract for the Relative August 15, 2007 USD Twenty-Eight 2007 CORPORATION Accuracy Test Audit up to November 15, 2007 Thousand Nine (RATA) for Continuous Hundred and 00/100 Emission Monitoring only ($28,900.00) System (CEMS) of Units 1 & 2 (PO-49657) 3. August TEAM SUAL Contract for the Relative August 15, 2007 USD Thirty-One 2007 CORPORATION Accuracy Test Audit up to November 15, 2007 Thousand Five (RATA) for Sual Units 1 Hundred and 00/100 & 2 (PO-49507) only ($31,500.00) 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: HEDSIc "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) HSIaAT 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. 7344 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6884 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, considering that the proof of payment of services fees to TRC show that TSC and TEC remitted their respective service fees on January 14, 2008, February 8, 2007 and January 16, 2008 , and, the TTRA was only filed January 10, 2008 , in violation of Section III (2) of RMO 1-2000, this Office hereby DENIES the TTRA for having been filed beyond the 15-day period prescribed by the RMO. Consequently, the service fees received by TRC from TSC and TEC pursuant to the aforementioned contracts shall be subject to the income tax rate of 30 percent as provided under Section 28 (B) (1) of the 1997 National Internal Revenue Code, as amended. Moreover, Section 108 of the Tax Code of 1997, as amended, provides that the above fees for such services rendered in the Philippines are subject to value-added tax (VAT): "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), 1 after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). EDCTIa The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . ." (Underscoring supplied) With regard to the procedures for withholding and paying the VAT, TEC and TSC, being the resident withholding agents and parties in control of payment, shall be responsible for the withholding of the final VAT on such fees before making any payment to TRC. In remitting the VAT withheld, TEC and TSC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld) . The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from TEC and TSC if they are VAT-registered taxpayers. In case TEC and TSC are non-VAT-registered taxpayers, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, TEC and TSC are required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for TRC and the fourth copy for TEC and TSC as their file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12% on February 1, 2006 , in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.