ITAD BIR Ruling No. 131-12

March 23, 2012 ITAD BIR RULING NO. 131-12 Protocol, Philippines-Japan tax treaty; BIR Ruling No. ITAD 120-01; BIR Ruling No. ITAD 116-04; BIR Ruling No. ITAD 190-03 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Antonette C. Tionko Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application filed on August 11, 2010, on behalf of your client, SUMITOMO ELECTRIC INDUSTRIES, LTD. ("SEI"), requesting confirmation that the remittance of profits by SEI's Philippine branch office to its Head Office in Japan is subject to the preferential tax rate of 10 percent pursuant to the supplemental Protocol 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that SEI, with office address at 4-5-33, Kitahama, Chuo-ku, Osaka, 541-0041, Japan, is a resident of Japan within the meaning of Article 4 of the Philippines-Japan tax treaty, as evidenced by the Residence Certificate issued by the District Director of Higashi Tax Office dated January 13, 2009; that SEI is a nonresident foreign corporation duly organized and existing under the laws of Japan, engaged in the business of developing, manufacturing, processing and selling of electric wires and cables, optical fiber cables and other products and equipment for electric power transmission and distribution or for communication; that SEI, under Securities and Exchange Commission ("SEC") No. A199810992, has been granted a license to transact business in the Philippines and its branch office was established at 5th Floor, King's Court I Building, 2129 Pasong Tamo Street, Makati City; and that, on October 27, 2010 the Certificate of Withdrawal of the aforementioned license was approved by SEC, as confirmed by SEC Certificate of Corporate Filing/Information dated December 21, 2010. aTEScI It is further represented that considering the cessation of business operations of SEI's Philippine Branch, its existing cash balance (net of taxes) at the Bank of Tokyo Mitsubishi UFJ Manila Branch consisting of: a) accumulated income in peso-Php23,867,571.39; b) accumulated income in US$-US$477,570.35; c) capital investment-Php8,294,667.00; and, d) borrowing from SEI-Php271,863.00, are earmarked to be remitted to SEI as shown in the Sworn certification issued by a representative officer of SEI on April 28, 2011; and, that the issue or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal based on the Certification of SEI's Philippine Branch dated August 2, 2010. In reply, please be informed that Section 28 (A) (5) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to profits remitted by a branch to its head office. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, that effective January 1, 2009, the rate of income tax shall be thirty percent (30%). TACEDI xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. xxx xxx xxx" However, paragraph 5 of the supplemental Protocol to the Philippines-Japan tax treaty, which took effect on January 1, 2009 provides as follows, to wit: "PROTOCOL At the signing of 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 (hereinafter referred to as "the Convention"), the undersigned have agreed upon the following provisions which form an integral part of the Convention. xxx xxx xxx 5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 per cent of the amount of such earnings which is remitted abroad. For the purposes of this paragraph, the term "earnings" means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines. xxx xxx xxx" Based on the foregoing, the profits earned by a Japanese company through its permanent establishment, net of Philippine income tax, if remitted abroad, are subject to tax at a rate not exceeding 10 percent of such earnings. Under Article 5 of the same tax treaty, the term "permanent establishment" includes a branch, viz.: "Article 5 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx" In view of the above provisions, since the remitting party is a branch office of SEI, this Office is of the opinion and so holds that the remittance of branch profits, in the amount of Php23,867,571.39 and US$477,570.35, is subject to the preferential tax rate of 10 percent pursuant to paragraph 5 of the supplemental Protocol to the Philippines-Japan tax treaty. (BIR Ruling No. ITAD 120-01 dated December 6, 2011; BIR Ruling No. ITAD 116-04 dated October 27, 2004; BIR Ruling No. ITAD 190-03 dated December 5, 2003) 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. Protocol Amending 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 effective January 1, 2009.