ITAD BIR Ruling No. 134-12

March 27, 2012 ITAD BIR RULING NO. 134-12 Article 11, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-066-10 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Ms. Lina P. Figueroa Principal, Tax Advisory and Compliance Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 23, 2010, on behalf of B&M Global Services Manila, Inc. ("B&M Global") requesting confirmation that the interest income of B&M Services International B.V. ("B&M Services") under a Loan Facility Agreement ("Loan Facility") made with B&M Global are subject to 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 B&M Services , with principal office address at Claude Debussylaan 54, 1082 MD Amsterdam, is a resident of The Netherlands 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 October 6, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 29, 2009; and that, on the other hand, B&M Global is a corporation duly organized and existing under the laws of the Philippines with principal office 14th Floor, Net One Center, 26th Street corner 3rd Avenue, Crescent Park West, Bonifacio Global City, Taguig City. It is further represented that as of November 25, 2009, the issued and outstanding capital stock of B&M Global is One Hundred Thousand Pesos (Php100,000.00), divided into Ten Thousand shares with a par value of Ten Pesos (10.00) per share; that B&M Services is the owner of record of Nine Thousand Nine Hundred Ninety-Five (9,995) shares of B&M Global with a par value of Ten Pesos (P10.00) per share since December 31, 2005 as per Secretary's Certificate dated December 9, 2009. EaHATD It is also represented that on October 31, 2005, a Loan Facility Agreement ("Agreement") was executed by and between B&M Services and B&M Global whereby both agree as follows: 1. Loans B&M Services agrees that it will from time to time advance by way of loans to B&M Global in United States dollar (or in such other currency as may be agreed to by the parties) such amounts as may be agreed to from time to time between B&M Services and B&M Global. 2. Repayment Each Loan made together with all interest then accrued thereon shall be repayable by B&M Global within thirty days of notice in writing being given by the B&M Services that it requires repayment of loan. However, B&M Global may at any time give B&M Services one day's written notice that B&M Global wishes to repay the whole or any part of the loan together with accrued interest. 3. Interest B&M Global shall pay B&M Services interest on the weighted average principal amount of loans outstanding during an applicable interest period at a rate equal to the average LIBOR 1 for such applicable interest period, or such other rate as may be agreed between the parties, plus a margin as may be agreed between the parties, which margin as so agreed shall remain in effect until the parties agree to a different margin. Such interest shall be payable at periodic intervals as agreed between the parties while the loans or any part thereof are outstanding ("interest period"). Interest payable under Agreement shall be calculated on the basis of a 360 day year. 4. Note Upon request of B&M Services, B&M Global shall execute a promissory note as evidence of the loans owing by B&M Global to B&M Services (such promissory note, together with any and all renewal, extension, modification or replacement notes executed by B&M Global and delivered to B&M Services and given in substitution therefor, the "Note"). The liability of B&M Global under the Agreement shall not be affected by the issue of the Note, except that it will be a good defence to a demand for payment under the Agreement if B&M Services can show that a corresponding payment has been made under the Note. No amount shall be recoverable by the holder under the Agreement taking into account any payment deemed to have been made under the Agreement. aHADTC It is further represented, based on the Certificate of Inward Remittance issued by the Bank of the Philippines Islands ("BPI") on December 8, 2009, that its branch in Bonifacio Global City received inward remittance by means of telegraphic transfer from JP Morgan Chase Manhattan Bank New York, by order of B&M Services , the amounts of US$3,185,850.00 and US$1,274,940.00 which net proceeds were credited to the dollar account of B&M Global. It is finally represented, based on the Sworn Certification by B&M Global on March 23, 2010, 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. 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 . . ." (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. EcATDH 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) 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. EB Case No. 456 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, this Office hereby DENIES relief on the interests paid by B&M Services to B&M Global before the subject TTRA was filed on March 23, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said royalties shall be subject to income tax at the rate provided under Sections 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%)." (Underscoring supplied) However, interest payable after 15 days from the date of the filing of the TTRA starting on April 7, 2010 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-Netherlands tax treaty (BIR Ruling No. ITAD 066-10 dated November 30, 2010). It provides: "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: AcHCED a) 10 per cent 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 per cent 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. xxx xxx xxx" 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. "LIBOR" means the British Bankers' Association Interest Settlement Rate for one month deposits in the currency of the applicable loan as displayed on the appropriate page of the Reuters screen (or other similar source as of 11:00 a.m. (London time) on the first business day of each calendar month (or such other date as the parties may agree), which rate shall be applicable from such date of determination until the next ensuing date of determination in the succeeding calendar month (or such other date as the parties may agree) when LIBOR shall be reset.