ITAD BIR Ruling No. 145-12

March 30, 2012 ITAD BIR RULING NO. 145-12 Articles 5 and 11, Philippines-Japan tax treaty, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Jules E. Riego Principal, Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 22, 2009 requesting confirmation that interest paid by Nikko Metals Philippines, Inc. ("Nikko Metals") (formerly Nikko Materials Philippines, Inc.) to Sumitomo Bank Banking Corporation ("Sumitomo Bank") and Nippon Mining and Metals Company Ltd. ("Nippon Mining") is subject to income tax at the rate of 10 percent rate pursuant 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 ("Philippines-Japan tax treaty"), as amended by a Protocol 1 effective January 1, 2009. Facts Sumitomo Bank is a corporation organized and existing under the laws of Japan based on the Certification of Residence issued by the Kojimachi Tax Office in Japan on April 3, 2009. Sumitomo Bank is situated at 1-2, Yurakucho, 1-chome, Chiyoda-ku, Tokyo, Japan. Based on the Certification issued by the Securities and Exchange Commission ("SEC") on July 7, 2009, Sumitomo Bank is licensed to establish a representative office in the Philippines under SEC Registration No. AF95000032. Nippon Mining is a corporation organized and existing under the laws of Japan based on the Certificate of All Matters at Present issued by the Tokyo Legal Affairs Bureau in Japan on February 16, 2009. Nippon Mining is situated at 10-1 Toranomon, 2-chome, Minato-ku, Tokyo, Japan. Nippon Mining is not registered as a corporation or partnership in the Philippines based on the Certification issued by the SEC on July 7, 2009. On the other hand, Nikko Metals is a domestic corporation situated at 117 East Science Avenue, Special Economic Processing Zone, Laguna Technopark, Bian, Laguna, Philippines. caTESD On March 25, 2009, Sumitomo Bank (through its branch office in Hong Kong) 2 issued a Facility Letter to Nikko Metals where Sumitomo Bank granted Nikko Metals a revolving credit facility of US$7,000,000.00 to finance general working capital requirements. On March 25, 2009, Sumitomo Bank (through its branch office in Hong Kong) issued a Facility Letter to Nikko Metals where Sumitomo Bank granted Nikko Metals a revolving credit facility of US$7,000,000.00 to finance its general working capital requirements. Nikko Metals may draw an advance from the facility by submitting a notice of drawing to Sumitomo Bank at least one business day before the date of the advance. Nikko Metals will pay each advance in full on its repayment date as indicated in the notice of drawing. Amounts repaid may be re-drawn before the cancellation or termination of the facility. Nikko Metals will pay interest on each advance in arrears on the relevant repayment date at an annual rate of interest agreed upon by the parties. Based on computer-generated statements issued by Mizuho Corporate Bank Ltd. Manila Branch on December 8, 2005, September 27, 2006, and November 28, 2006, Nikko Metals received the following remittances from Sumitomo Bank (through its branch office in Hong Kong): 1. US$1,000,000.00 on December 8, 2005 2. US$2,000,000.00 on September 27, 2006 3. US$2,000,000.00 on November 29, 2006. Based on the notice issued by Nikko Metals to Sumitomo Bank (through its branch office in Hong Kong) on March 26, 2008, Nikko Metals had an advance of US$2,000,000.00, which was drawn on March 27, 2008 and matured on September 29, 2008 and with an interest of 3.88375 percent per annum. Based on the Confirmation issued by Sumitomo Bank (through its branch office in Hong Kong) to Nikko Metals on December 10, 2010, Nikko Metals had an advance of US$1,000,000.00, which was drawn on December 10, 2010, and matured on June 10, 2011, with an interest of 1.70844 percent per annum. Based on the Certification issued by the Resident Agent of the representative office in the Philippines of Sumitomo Bank ("Sumitomo Bank Philippine Representative Office") on November 24, 2010, interest paid by Nikko Metals to Sumitomo Bank is not effectively connected with Sumitomo Bank Philippine Representative Office since the latter's business activities are limited solely to collecting and analyzing the macro information on the Philippines for the benefit of domestic and overseas customers of Sumitomo Bank, assisting these customers to invest in the Philippines, searching for business partners, and preparing the establishment of a branch or subsidiary of these investors and partners in the future. Sumitomo Bank Philippine Representative Office is situated at 20th Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City, Philippines. On August 1, 2008, Nikko Metals issued a Grid Note to Nippon Mining where Nikko Metals promised Nippon Mining to pay the loan of US$45,000,000.00 which bears a floating rate of interest at that date. Based on the computer-generated statements issued by Mizuho Corporate Bank Ltd. Manila Branch 3 on August 29 and September 25, 2008, Nikko Metals received the following remittances from Nippon Mining (through the Bank of Tokyo-Mitsubishi UFJ Ltd.: 4 1. US$30,000,000.00 on August 29, 2008. 2. US$15,000,000.00 on September 25, 2008. 3. US$2,000,000.00 on November 29, 2006. 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: IEAHca "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) cDIHES This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the requirement 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, since the subject TTRA was filed on July 22, 2009, and the loans subject of the Facility Letter were granted by Sumitomo Bank to Nikko Metals as early as 2005, and those subject of the Grid Note were granted by Nippon Mining to Nikko Metals as early as 2006, this Office hereby DENIES relief on interest paid by Nikko Metals to Sumitomo Bank and Nippon Mining before the fifteenth day of filing the TTRA, or on August 6, 2009, in accordance with 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) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: "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 Nikko Metals to Sumitomo Bank and Nippon Mining on August 6, 2009 and thereafter is subject to relief under paragraphs 1 and 2, Article 11 of the Philippines-Japan tax treaty, to wit: "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 per cent of the gross amount of the interest." Accordingly, interest paid by Nikko Metals to Sumitomo Bank and Nippon Mining under the Facility Letter and the Grid Note and made on August 6, 2009 and thereafter shall be subject to income tax at the rate of 10 percent. However, under paragraph 5, Article 11 of the Philippines-Japan tax treaty, the reduced rate of income tax on the interest under paragraph 2 of the article does not apply if the interest is effectively connected with a permanent establishment which Sumitomo Bank has in the Philippines, to wit: TDcAIH "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." Under paragraphs 1 and 2, Article 5 of the tax treaty, Sumitomo Bank Philippine Representative Office constitutes a permanent establishment of Sumitomo Bank, to wit: "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. " Relative thereto, based on the representations made, interest paid by Nikko Metals to Sumitomo Bank is not effectively connected with Sumitomo Bank Philippine Representative Office since the latter's business activities are limited solely to collecting and analyzing the macro information on the Philippines for the benefit of domestic and overseas customers of Sumitomo Bank, to assisting these customers to invest in the Philippines, to searching for business partners, and to preparing the establishment of a branch or subsidiary of these investors and partners in the future. These activities do not permit Sumitomo Bank Philippine Representative Office to have a participation in the granting of loans by Sumitomo Bank to its clients like Nikko Metals. This being the case, such interest shall be subject to income tax at the rate of 10 percent as earlier ruled. TaSEHC Finally, under Section 179 of the Tax Code, all loans and advances made pursuant to the Facility Letter and the Grid Note are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of loan or advance, 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." This ruling is issued on the basis of the actual facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. TADaES 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. 2. Situated at 7th and 8th Floors, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. 3. Situated at 26th Floor, F Citibank Tower, Valero corner Villar Streets, Salcedo Village, Makati City, Philippines. 4. Situated at Marunouchi 2-7-1, Chiyoda-ku, Tokyo, Japan.