ITAD BIR Ruling No. 138-12

March 27, 2012 ITAD BIR RULING NO. 138-12 Article 11 (Interest); Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 66-10 Manabat Delgado Amper & Co. 5th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Myra V. Torres Tax Manager Richard R. Lapres Tax Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on March 15, 2010 requesting confirmation that interest paid by Hitachi Global Storage Technologies Philippines Corporation ("Hitachi Philippines") to Hitachi Global Storage Netherlands BV ("Hitachi Netherlands") is subject to income tax at the rate of 15 percent 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"). Facts Hitachi Netherlands is a corporation organized and existing under the laws of the Netherlands and is a resident thereof based on the Declaration of Residence issued by the Tax Administration of the Netherlands on October 14, 2009. Hitachi Netherlands is situated at Veldweg 3, 6075 NL Herkenbosch, the Netherlands. Hitachi Netherlands is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on October 26, 2009. On the other hand, Hitachi Philippines is a domestic corporation situated at the Special Export Processing Zone, Phase II, Laguna Technopark, Bian, Laguna, Philippines. On September 22, 2003, Hitachi Philippines and Hitachi Netherlands entered into a Multicurrency Credit Facility Agreement where Hitachi Netherlands agreed to provide loan to Hitachi Philippines of up to US$35,000,000.00 to finance its ordinary working capital and general corporate needs including the settlement of supplier invoices, to repay other indebtedness, to provide intercompany loans to its affiliates, and for other purposes. The loan was available from September 22, 2003. To avail of an advance from the loan, Hitachi Philippines will deliver a duly completed drawdown notice to Hitachi Netherlands not later than three business days prior to the proposed drawdown date. The rate of interest on the advance will be specified by Hitachi Netherlands in the notice of confirmation sent to Hitachi Philippines. AaITCS On the following dates, Hitachi Philippines and Hitachi Netherlands entered into a series of amendment to the Agreement for the purpose of increasing or decreasing the loan available to Hitachi Philippines, to wit: Date Amended Amount (in US Dollars) 1. First Amendment March 3, 2004 99,000,000.00 2. Second Amendment July 28, 2006 136,000,000.00 3. Third Amendment April 1, 2007 109,000,000.00 4. Fourth Amendment December 5, 2007 145,000,000.00 5. Fifth Amendment April 2008 147,000,000.00 Based on the Certification issued on September 29, 2009 by the Service Officer of the head office of Citibank NA in the Philippines 1 and on the Affidavit issued by the Vice President and Chief Financial Officer of Hitachi Philippines on December 18, 2010, Hitachi Philippines received the following amounts from Hitachi, to wit: Date Amount Date Amount (In US Dollars) (In US Dollars) February 4, 2005 11,500,000.00 July 17, 2007 1,200,000.00 March 11, 2005 1,600,000.00 July 26, 2007 1,000,000.00 April 26, 2005 16,000,000.00 July 27, 2007 4,200,000.00 May 27, 2005 3,400,000.00 December 27, 2007 5,100,000.00 June 28, 2005 4,000,000.00 February 5, 2008 5,900,000.00 July 21, 2005 7,500,000.00 February 27, 2008 2,400,000.00 September 28, 2005 3,500,000.00 March 28, 2008 10,800,000.00 October 28, 2005 4,000,000.00 April 28, 2008 8,700,000.00 January 27, 2006 3,000,000.00 June 12, 2008 1,500,000.00 April 27, 2006 6,000,000.00 July 30, 2008 1,700,000.00 December 28, 2006 7,000,000.00 August 28, 2008 1,100,000.00 January 30, 2007 700,000.00 January 29, 2009 4,200,000.00 February 27, 2007 9,000,000.00 February 26, 2009 700,000.00 March 29, 2007 4,800,000.00 March 30, 2009 5,500,000.00 June 18, 2007 700,000.00 August 27, 2009 4,000,000.00 June 28, 2007 12,800,000.00 Based on the Certification issued by the Senior Tax Manager of Manabat Delgado Amper and Co. on January 12, 2012, Hitachi Philippines paid interest to Hitachi in the following years: TDSICH Date of Amount of Interest Paid Loan Loan 2005 2006 2007 2008 2009 Total (in US Dollars) 02/24/2005 11,500,000.00 363,529.00 63,121.00 426,650.00 03/11/2005 1,600,000.00 49,955.00 11,476.00 61,431.00 04/26/2005 16,000,000.00 431,850.00 198,651.00 630,501.00 05/27/2005 3,400,000.00 81,638.00 54,053.00 135,691.00 06/28/2005 4,000,000.00 82,271.00 79,588.00 161,859.00 07/21/2005 7,500,000.00 145,620.00 178,474.00 324,094.00 09/28/2005 3,500,000.00 41,933.00 119,177.00 161,110.00 10/28/2005 4,000,000.00 35,038.00 161,173.00 196.211.00 01/27/2006 3,000,000.00 128,595.00 128,595.00 04/27/2006 6,000,000.00 24,977.00 24,977.00 12/28/2006 7,000,000.00 2,114.00 379,446.00 381,560.00 01/30/2007 700,000.00 36,415.00 36,415.00 02/27/2007 9,000,000.00 425,455.00 79,251.00 504,707.00 03/29/2007 4,800,000.00 198,244.00 62,490.00 260,734.00 06/18/2007 700,000.00 21,466.00 18,824.00 40,290.00 06/28/2007 12,800,000.00 367,719.00 357,835.00 725,554.00 07/17/2007 1,200,000.00 30,445.00 37,356.00 67,801.00 07/26/2007 1,000,000.00 23,749.00 32,230.00 55,979.00 07/27/2007 4,200,000.00 99,412.00 134,917.00 234,329.00 12/27/2007 5,100,000.00 3,209.00 235,565.00 238,774.00 02/05/2008 5,900,000.00 165,183.00 18,354.00 183,536.00 02/27/2008 2,400,000.00 64,594.00 11,839.00 76,433.00 03/28/2008 10,800,000.00 228,470.00 71,500.00 299,970.00 04/28/2008 8,700,000.00 195,903.00 92,003.00 287,906.00 06/12/2008 1,500,000.00 403.00 403.00 07/30/2008 1,700,000.00 25,561.00 34,690.00 60,252.00 08/28/2008 1,100,000.00 13,072.00 25,098.00 38,170.00 01/29/2009 4,200,000.00 86,112.00 86,112.00 02/26/2009 700,000.00 13,578.00 13,578.00 03/30/2009 5,500,000.00 96,106.00 96,106.00 08/27/2009 4,000,000.00 25,818.00 25,818.00 Total 1,231,834.00 1,021,398.00 1,585,561.00 1,651,655.00 475,097.00 5,965,545.00 ========== ========== ========== ========== ========== ========== Ruling 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. CAcIES 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 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. 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, since the subject TTRA was filed on March 15, 2010, and the amended Loan Agreement that give rise to the advances took effect on September 22, 2003, and interest on these advances was paid by Hitachi Philippines to Hitachi Netherlands from 2005 and thereafter, this Office hereby DENIES relief on such interest paid before the fifteenth day of filing of the TTRA, or on March 30, 2010, in accordance with to Section III (2) of RMO 1-2000. Accordingly, said interest shall be subject to income tax at the rate of 20 percent under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: IDTSEH "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) 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." On the other hand, interest paid by Hitachi Philippines to Hitachi Netherlands on March 30, 2010 and thereafter is subject to relief under paragraph 2, Article 11 of the Philippines-Netherlands tax treaty, to wit: "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 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, DCTHaS (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." Accordingly, since the interest paid by Hitachi Philippines to Hitachi Netherlands under the amended Loan Agreement is not in respect of the sale on credit of any industrial, commercial or scientific equipment, of a loan granted by a bank or a financial institution, or of public issues of bonds, debentures, or similar obligations, such interest paid on March 30, 2010 and thereafter shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2 (b), Article 11 of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 66-10 dated November 30, 2010) Finally, under Section 179 of the Tax Code, the advances made pursuant to the amended Loan Agreement are subject to documentary stamp tax under Section 179 of the Tax Code, to wit: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." ITcCaS 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. Situated at 8741 Paseo de Roxas, Makati City, Philippines.