ITAD BIR Ruling No. 149-12

April 4, 2012 ITAD BIR RULING NO. 149-12 Articles 5, 10, 11 and 12; Philippines-Japan tax treaty Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 26, 2007 requesting confirmation that dividends, interest and royalties paid by Coral Bay Nickel Corporation ("Coral Bay") to: 1. Mitsui and Company Ltd. ("Mitsui") 2. Sojitz Corporation ("Sojitz") (formerly Nissho Iwai Corporation) 3. Sumitomo Metal Mining Company Ltd. ("Sumitomo Metal") 4. Sumitomo Mitsui Banking Corporation ("Sumitomo Bank") (formerly Sumitomo Bank Ltd.) 5. Sumitomo Seika Chemicals Company Ltd. ("Sumitomo Chemicals") are subject to income tax at the rate of 10 percent 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 Mitsui is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Kojimachi Tax Office in Japan on June 8, 2007. Mitsui is situated at 1-2-1, Ohtemachi, Chiyoda-ku, Tokyo, Japan. Mitsui is licensed by the Securities and Exchange Commission ("SEC") to engage in business in the Philippines under Company Registration No. F-490 issued on March 17, 1967, based on the Certificate of Corporate Filing/Information issued on August 22, 2007. IEcaHS Sojitz is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Azabu Tax Office in Japan on June 13, 2007. Sojitz is situated at 1-20, Akasaka 6-chome, Minato-ku, Tokyo, Japan. Sojitz is licensed by the SEC to engage in business in the Philippines under Company Registration No. F-496 issued on April 4, 1967, based on the Certificate of Corporate Filing/Information issued on August 22, 2007. Sumitomo Metal is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Shiba Tax Office in Japan on May 30, 2007. Sumitomo Metal is situated at 11-3, 5-chome, Shimbashi, Minato-ku, Tokyo, Japan. Based on the letters of the Law Offices of V.E. del Rosario and Associates to the SEC on December 20, 1984, March 13 and October 12, 1987, and November 3, 2008, Sumitomo Metal is licensed by the SEC to establish a representative office in the Philippines under Company Registration No. 620 issued on December 18, 1973. A petition to cancel such license was filed on October 6, 1987 and which was not acted upon by the SEC to date. Sumitomo Bank is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Tokyo Tax Office in Japan on June 8, 2007. Sumitomo Bank is situated at 1-2, Yurakucho 1-chome, Chiyoda-ku, Tokyo, Japan. Sumitomo Bank is licensed by the SEC to establish a representative office in the Philippines under Company Registration No. AF095-032 issued on March 24, 1995, based on the Certificate of Corporate Filing/Information issued on August 22, 2007. Sumitomo Chemicals is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Osaka Tax Office in Japan on July 6, 2007. Sumitomo Chemicals is situated at 346-1, Miyanishi, Harima-cho, Kako-gun, Hyogo, Japan. Sumitomo Chemicals is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Corporation/Partnership issued on July 25, 2007. Coral Bay is a domestic corporation situated at the 24th Floor, Pacific Star Building, Makati Avenue corner Sen. Gil Puyat Avenue, Makati City, Philippines. Coral Bay is registered with the Board of Investments ("BOI") as a pioneer enterprise engaged in the production of mixed sulphides of nickel and cobalt under Certificate of Registration No. EP 2002-089 issued on June 27, 2002. Coral Bay is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise engaged in the production of mixed sulphides of nickel and cobalt under Certificate of Registration No. 02-072 issued on December 27, 2002. Dividends Based on the Minutes of the Organizational Meeting of the Board of Directors of Coral Bay on May 18, 2007 and on the Certificates issued by the Corporate Secretary of Coral Bay on February 14, 2008 and June 12, 2007, Coral Bay declared cash dividends of US$10,000,000.00 on May 18, 2007 in favor of its stockholders of record as of December 31, 2006, which will taken out of its unrestricted retained earnings as of that date. As of May 31, 2007, Mitsui, Sojitz and Sumitomo Metal hold 105,749,999, 105,749,999 and 317,249,996 of the 587,500,000 common shares of stock of Coral Bay equivalent to 17.99 percent, 17.99 percent and 53.99 percent stockholding in Coral Bay, respectively, each share with a par value of P1.00. Based on the Advices of Debit issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch 2 on June 13, 2008, the dividends were actually remitted on June 13, 2008 through telegraphic transfer with Mitsui, Sojitz and Sumitomo Metal receiving US$2,430,000.00, US$2,430,000.00 and US$7,290,000.00, respectively. Based on the Certification issued by the General Manager of the branch office in the Philippines of Mitsui ("Mitsui Philippine Branch") on February 8, 2008, Mitsui Philippine Branch was not a material factor in the realization of dividends paid by Coral Bay to Mitsui. The dividends were not realized in the ordinary course of trade or business of Mitsui Philippine Branch. The dividends were not used, or held for use, in the conduct of the trade or business of Mitsui Philippine Branch. Mitsui Philippine Branch is situated at 36th Floor, GT Tower International, 6815 Ayala Avenue, Makati City, Philippines. ADHCSE Based on the Certification issued by the Senior General Manager of the branch office in the Philippines of Sojitz ("Sojitz Philippine Branch") on January 28, 2008, Sojitz Philippine Branch was not a material factor in the realization of dividends paid by Coral Bay to Sojitz. The dividends were not realized in the ordinary course of trade or business of Sojitz Philippine Branch. The dividends were not used, or held for use, in the conduct of the trade or business of Sojitz Philippine Branch. Sojitz Philippine Branch is situated at 24th Floor, Pacific Star Building, Makati Avenue corner Sen. Gil Puyat Avenue, Makati City, Philippines. Based on the Certification issued by the General Manager of Sumitomo Metal on February 3, 2009, the representative office in the Philippines of Sumitomo Metal ("Sumitomo Metal Philippine Representative Office") has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of dividends paid by Coral Bay to Sumitomo Metal. The dividends were not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office. The dividends were not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. Sumitomo Metal Philippine Representative Office is situated at Room 801, Araza Building, Makati Avenue corner Paseo de Roxas Street, Makati City, Philippines. Interest Loan Agreement between Coral Bay and Sojitz On October 22, 2002, Coral Bay and Sojitz entered into a Loan Agreement where Sojitz granted Coral Bay a loan of US$15,435,000.00 to finance the construction of Coral Bay's production facility for nickel and cobalt mixed sulphides. The loan bears interest equal to the London Interbank Offer Rate ("LIBOR") for six months of the United States dollars plus 0.625 percent per annum. The loan will be paid as follows: Date of Principal Principal Date of Principal Principal Payment of Repaid Subject to Payment of Repaid Subject to Principal and (in US Dollars) Interest Principal and (in US Dollars) Interest Interest (in US Dollars) Interest (in US Dollars) 02/21/2006 771,750.00 15,435,000.00 02/21/2011 771,750.00 7,717,500.00 08/21/2006 771,750.00 14,663,250.00 08/21/2011 771,750.00 6,945,750.00 02/21/2007 771,750.00 13,891,500.00 02/21/2012 771,750.00 6,174,000.00 08/21/2007 771,750.00 13,119,750.00 08/21/2012 771,750.00 5,402,250.00 02/21/2008 771,750.00 12,348,000.00 02/21/2013 771,750.00 4,630,500.00 08/21/2008 771,750.00 11,576,250.00 08/21/2013 771,750.00 3,858,750.00 02/21/2009 771,750.00 10,804,500.00 02/21/2014 771,750.00 3,087,000.00 08/21/2009 771,750.00 10,032,750.00 08/21/2014 771,750.00 2,315,250.00 02/21/2010 771,750.00 9,261,000.00 02/21/2015 771,750.00 1,543,500.00 08/21/2010 771,750.00 8,489,250.00 08/21/2015 771,750.00 771,750.00 Total 15,435,000.00 - =========== Based on the Certificate of Inward Remittances issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch on June 4, 2007, Coral Bay received the following amounts from Sojitz totalling US$15,435,000.00: US$3,077,560.98 (October 29, 2002),US$2,466,000.00 (January 27, 2003),US$4,701,600.00 (April 24, 2003),US$3,276,000.00 (July 28, 2003) and US$1,913,839.02 (September 24, 2003). Based on the Certification issued by the Senior General Manager of Sojitz Philippine Branch on January 25, 2008, Sojitz Philippine Branch was not a material factor in the realization of interest paid by Coral Bay to Sojitz. The interest was not realized in the ordinary course of trade or business of Sojitz Philippine Branch and the interest was not used, or held for use, in the conduct of the trade or business of Sojitz Philippine Branch. Term Loan Agreement between Coral Bay and Sumitomo Metal On November 10, 2003, Coral Bay and Sumitomo Metal entered into a Term Loan Agreement where Sumitomo Metal granted Coral Bay a loan of US$23,520,000.00 to finance Coral Bay's operating and capital expenditures. The loan bears interest equal to the LIBOR for six months of the United States dollars plus 2 percent per annum. The loan will be paid as follows: Date of Principal Principal Date of Principal Principal Payment of Repaid Subject to Payment of Repaid Subject to Principal and (in US Dollars) Interest Principal and (in US Dollars) Interest Interest (in US Dollars) Interest (in US Dollars) 02/21/2006 2,352,000.00 23,520,000.00 08/21/2008 2,352,000.00 11,760,000.00 08/21/2006 2,352,000.00 21,168,000.00 02/21/2009 2,352,000.00 9,408,000.00 02/21/2007 2,352,000.00 18,816,000.00 08/21/2009 2,352,000.00 7,056,000.00 08/21/2007 2,352,000.00 16,464,000.00 02/21/2010 2,352,000.00 4,704,000.00 02/21/2008 2,352,000.00 14,112,000.00 08/21/2010 2,352,000.00 2,352,000.00 Total 23,520,000.00 - ============ Based on the same Certificate issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch, Coral Bay received the following amounts from Sumitomo Metal totalling US$23,520,000.00: US$6,400,000.00 (November 25, 2003) and US$3,500,000.00, US$4,700,000.00, US$3,020,000.00 and US$5,900,000.00 (February 26, 2004). CcSEIH Based on the Certification issued by the General Manager of Sumitomo Metal on February 3, 2009, Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of interest paid by Coral Bay to Sumitomo Metal. The interest was not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office and that the interest was not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. Facility Letters issued by Sumitomo Bank to Coral Bay On September 9, 2004, March 17 and August 23, 2005 and June 21, 2006, Sumitomo Bank (through its branch office in Hong Kong) 3 issued Facility Letters to Coral Bay where Sumitomo Bank granted Coral Bay a revolving credit facility of US$7,380,000.00, US$8,000,000.00, US$11,875,000.00, US$10,762,500.00 and US$24,600,000.00, respectively, to finance Coral Bay' s general working capital requirements. Coral Bay may draw an amount from each facility (which constitutes an advance) by making a notice of drawing to Sumitomo Bank not later than one business day before the date of the advance. An advance will be repaid in full on its repayment date and any amounts repaid may be redrawn before the cancellation or termination of the facility. Each advance bears interest on its repayment date at a rate to be agreed upon between Sumitomo Bank and Coral Bay. Based on the Minutes of Action of the Board of Directors of Coral Bay on January 29, 2007, the Board of Directors authorized Coral Bay to apply for another Facility Letter from Sumitomo Bank on that date where Sumitomo Bank would grant Coral Bay a revolving credit facility of US$75,000,000.00. Based on the same Certificate issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch, Coral Bay received the following amounts from Sumitomo Bank totalling US$77,197,500.00: US$3,280,000.00 (January 18, 2005),US$4,000,000.00 (April 25, 2005),US$2,000,000.00 (June 8, 2005),US$6,000,000.00 (February 17, 2006),US$867,500.00 (June 30, 2006),US$2,050,000.00 (November 29, 2006),US$49,000,000.00 (January 30, 2007),US$500,000.00 and US$3,500,000.00 (March 30, 2007) and US$6,000,000.00 (April 27, 2007). Based on the Advice of Debit issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch on March 31, 2009, principal amounting US$1,000,000.00 and interest amounting US$83,675.97 were remitted by Coral Bay to Sumitomo Bank on that date through telegraphic transfer. Based on the Certification issued by the Chief Representative of Sumitomo Bank Representative Office on February 4, 2008, Sumitomo Bank Representative Office was not a material factor in the realization of interest paid by Coral Bay to Sumitomo Bank. The interest was not realized in the ordinary course of trade or business of Sumitomo Bank Representative Office and the interest was not used, or held for use, in the conduct of the trade or business of Sumitomo Bank Representative Office. Sumitomo Bank Representative Office is situated at 20th Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City, Philippines. Royalties Technical Assistance and License Agreement between Coral Bay and Sumitomo Metal On October 1, 2002, Sumitomo Metal and Coral Bay entered into a Technical Assistance and License Agreement where Sumitomo Metal granted Coral Bay a non-exclusive and non-transferable right to use in the Philippines, but without the right to grant sublicenses, the High Pressure Acid Leaching Process belonging to Sumitomo Metal, and to apply any technical information and improvements to enable Coral Bay and its contractors to design, engineer, construct, enhance, maintain and operate the its plant and to produce its products. In consideration, Coral Bay will pay Sumitomo Metal an instalment fee of 37,000,000.00, payable every six months and for a period of ten years from the date Coral Bay recognized revenues in its books for the sale of its products using the Process. Coral Bay will also pay Sumitomo Metal a running royalty of 1 percent based on the total sales of the products computed and paid every six months. Based on the Certification issued by the General Manager of Sumitomo Metal on February 3, 2009, Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of royalties paid by Coral Bay to Sumitomo Metal. The royalties were not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office and the royalties were not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. License Agreement of Hydrogen Sulphide Production Facilities between Sumitomo Chemicals and Sumitomo Metal On December 10, 2001, Sumitomo Chemicals and Sumitomo Metal entered into a License Agreement of Hydrogen Sulphide Production Facilities where Sumitomo Chemicals granted Sumitomo Metal a non-exclusive license to install the facilities and to produce and use hydrogen sulphide in a nickel mixed sulphide production plant in Rio Tuba, Palawan in the Philippines. Sumitomo Chemicals will furnish technical assistance to Sumitomo Metal on the construction of the facilities. Upon the establishment of the Joint Venture, Sumitomo Metal will transfer its contractual rights and obligations to the Joint Venture and Sumitomo Chemicals will agree to such transfer. Sumitomo Chemicals will provide the Joint Venture with technical information required for the operation of the facilities. In consideration, Sumitomo Metal will pay Sumitomo Chemicals a compensation of 85,000,000.00 for the grant of the license and another compensation for the provision of technical information required for the operation of the facilities. The Assignment and Assumption Agreement among Sumitomo Chemicals, Sumitomo Metal and Coral Bay On October 1, 2002, Sumitomo Chemicals, Sumitomo Metal and Coral Bay entered into an Assignment and Assumption Agreement where Coral Bay was named as the Joint Venture referred to in the License Agreement. As a result thereof, Sumitomo Metal transferred its contractual rights and obligations to Coral Bay, and Coral Bay agreed to pay 42,500,000.00 to Sumitomo Metal to reimburse the amount advanced by the latter in connection with and pursuant to the Assignment and Assumption Agreement. Ruling Relative thereto, please be informed that with respect to dividends paid by Coral Bay to Mitsui, Sojitz and Sumitomo Metal, since the TTRA was filed on October 26, 2007 and the dividends were paid later on June 13, 2008, the dividends are qualified to relief (exemption from income tax or reduction of tax) under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), which provides: "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) Relative thereto, paragraphs 1, 2, 3 and 5, Article 10 of the Philippines-Japan tax treaty provide: "Article 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. xxx xxx xxx 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are 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." cEaACD Under Article 10, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the beneficial owner is a company which holds directly at least 25 percent of the voting shares of the company paying the dividends or the total shares of that company during the period of six months immediately preceding the date of payment of the dividends; (b) 10 percent of the gross amount if the company paying the dividends is registered with the BOI and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (c) 25 percent in all other cases. However, the reduced rate of income tax does not apply if the dividends are effectively connected with a permanent establishment which the company recipient of the dividends has in the Philippines. Accordingly, with respect to dividends paid by Coral Bay to Sumitomo Metal, since it holds directly at least 25 percent (in fact 53.99 percent ) of the total shares of Coral Bay during the period of six months from the date of declaration of the dividends on May 18, 2007 to the date of payment of the dividends on June 13, 2008, such dividends shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2 (a), Article 10 of the Philippines-Japan tax treaty. On the other hand, with respect to dividends paid by Coral Bay to Mitsui and Sojitz, since they do not hold directly at least 25 percent (in fact 17.99 percent each) of the total shares of Coral Bay, such dividends shall be subject to income tax at the rate of 25 percent pursuant to paragraph 2 (b),Article 10 of the treaty. The single rate of 10 percent without further qualification on the amount of stockholding of the recipient under paragraph 3 of Article 10 does not apply to the dividends in question although Coral Bay was registered previously with the BOI with a pioneer status. Since Coral Bay is already registered with PEZA at the time of the transaction ( i.e., payment of dividends),the fiscal and non-fiscal incentives available to Coral Bay are governed by Republic Act No. 7916, 4 as amended, and its implementing rules and regulations. Moreover, on the question of the dividends being effectively connected with the permanent establishments of Sumitomo Metal, Mitsui and Sojitz in the Philippines under paragraph 5, Article 10 of the treaty, the branch offices and representative office of these companies in the Philippines constitute such a permanent establishment under paragraph 2 (b) and (c),Article 5 of the treaty, 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: xxx xxx xxx b) a branch ; c) an office ." (Emphasis ours) However, as mentioned, the dividends are not effectively connected with Sumitomo Metal Philippine Representative Office, Mitsui Philippine Branch and Sojitz Philippine Branch since 1. Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of dividends paid by Coral Bay to Sumitomo Metal. The dividends were not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office. The dividends were not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. 2. Mitsui Philippine Branch was not a material factor in the realization of dividends paid by Coral Bay to Mitsui. The dividends were not realized in the ordinary course of trade or business of Mitsui Philippine Branch. The dividends were not used, or held for use, in the conduct of the trade or business of Mitsui Philippine Branch. 3. Sojitz Philippine Branch was not a material factor in the realization of dividends paid by Coral Bay to Sojitz. The dividends were not realized in the ordinary course of trade or business of Sojitz Philippine Branch. The dividends were not used, or held for use, in the conduct of the trade or business of Sojitz Philippine Branch. This being the case, dividends paid by Coral Bay to Sumitomo Metal, Mitsui and Sojitz are clearly subject to income tax at the rate of 10 percent (for Sumitomo Metal) and 25 percent (for Mitsui and Sojitz ) as earlier ruled. With respect to interest paid by Coral Bay to Sojitz, Sumitomo Metal and Sumitomo Bank under the Loan Agreement, the Term Loan Agreement and the Facility Letters, since the TTRA was filed on October 26, 2007, and such interest will be paid on February 21 and August 21 from 2006 to 2015 for Sojitz and on February 21 and August 21 from 2006 to 2010 for Sumitomo Metal, and for Sumitomo Bank, it received interest from Coral Bay on March 31, 2009, this Office hereby denies relief on interest paid by Coral Bay on or before the fifteenth day of filing the TTRA, or on or before November 10, 2007, pursuant to Section III (2) of RMO No. 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: "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 on November 11, 2007 and thereafter is subject to relief under paragraphs 1, 2, 3 and 6, 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: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. xxx xxx xxx 6. The provisions of paragraphs 1, 2 and 3 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." The Protocol, effective January 1, 2009, simplified the rate of income tax on interest in paragraph 2 of Article 11 to 10 percent thereby deleting paragraph 3 of the article and renumbering paragraphs 4, 5, 6, 7 and 8 of that article to paragraphs 3, 4, 5, 6 and 7. Under Article 11, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed, before January 1, 2009, (a) 10 percent if the interest is paid in respect of government securities, bonds or debentures, or is paid by a company registered with the BOI and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and (b) 15 percent in all other cases, and beginning January 1, 2009 and thereafter, 10 percent in all cases. However, the reduced rate of income tax does not apply if the interest is effectively connected with a permanent establishment which the company receiving the dividends has in the Philippines. ISDHcT Accordingly, since the interest paid by Coral Bay to Sojitz, Sumitomo Metal and Sumitomo Bank under the Loan Agreement, the Term Loan Agreement and the Facility Letters is not in respect of government securities, bonds or debentures, such interest shall be subject to income tax at the rate of 15 percent (for interest paid from November 11, 2007 and before January 1, 2009) and 10 percent (for interest paid from January 1, 2009 and thereafter), pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty. The single rate of 10 percent without further qualification on the nature of interest being paid under paragraph 3 of Article 11 does not apply to interest paid by Coral Bay from November 11, 2007 and before January 1, 2009 since, as discussed, Coral Bay is already registered with PEZA as early as 2002. Moreover, on the question of the interest being effectively connected with the permanent establishments of Sojitz, Sumitomo Metal and Sumitomo Bank in the Philippines under paragraph 6, Article 11 of the treaty, this is not the case for the branch office and representative offices of these companies in the Philippines since 1. Sojitz Philippine Branch was not a material factor in the realization of interest paid by Coral Bay to Sojitz. The interest was not realized in the ordinary course of trade or business of Sojitz Philippine Branch and the interest was not used, or held for use, in the conduct of the trade or business of Sojitz Philippine Branch. 2. Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of interest paid by Coral Bay to Sumitomo Metal. The interest was not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office and that the interest was not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. 3. Sumitomo Bank Representative Office was not a material factor in the realization of interest paid by Coral Bay to Sumitomo Bank. The interest was not realized in the ordinary course of trade or business of Sumitomo Bank Representative Office and the interest was not used, or held for use, in the conduct of the trade or business of Sumitomo Bank Representative Office. This being the case, interest paid by Coral Bay to Sojitz, Sumitomo Metal and Sumitomo Bank is clearly subject to income tax at the rate of 15 percent (from November 11, 2007 and before January 1, 2009) and 10 percent (from January 1, 2009 and thereafter),as earlier ruled. With respect to royalties paid by Coral Bay to Sumitomo Metal and Sumitomo Chemicals under the Technical Assistance and License Agreement, the License Agreement of Hydrogen Sulphide Production Facilities and the Assignment and Assumption Agreement, since the TTRA was filed on October 26, 2007, and these agreements were in effect since 2002, this Office hereby denies relief on royalties paid by Coral Bay on or before the fifteenth day of filing the TTRA, or on or before November 10, 2007, pursuant to Section III (2) of RMO No. 1-2000. Accordingly, said royalties shall be subject to income tax at the rate of 35 percent under Section 28 (B) (1) of the Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (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%)." On the other hand, royalties paid on November 11, 2007 and thereafter are subject to relief under paragraphs 1 to 5, Article 12 of the Philippines-Japan tax treaty, to wit: "Article 12 1. Royalties 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 royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are 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." The Protocol, effective January 1, 2009, reduced the rate of income tax on royalties in paragraph 2 (b) of Article 12 to 10 percent. Under Article 12, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the royalties are paid by a company registered with the BOI and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, (b) 15 percent if the royalties are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, and (c) before January 1, 2009, 25 percent, and beginning January 1, 2009 and thereafter, 10 percent, in all other cases. However, the reduced rate of income tax does not apply if the royalties are effectively connected with a permanent establishment which the company receiving the royalties has in the Philippines. Royalties means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience ("know-how"). Accordingly, since the royalties paid by Coral Bay to Sumitomo Metal and Sumitomo Chemicals under the Technical Assistance and License Agreement, the License Agreement of Hydrogen Sulphide Production Facilities and the Assignment and Assumption Agreement are not in respect of the use of cinematograph films and films or tapes for radio or television broadcasting, but essentially in respect of the use of process (the High Pressure Acid Leaching Process) and know-how (technical information on the design, engineer, construction, enhancement, maintenance and operation of the facility that produces mixed sulphides of nickel and cobalt),such royalties shall be subject to income tax at the rate of 25 percent (for royalties paid from November 11, 2007 and before January 1, 2009) and 10 percent (for royalties paid from January 1, 2009 and thereafter), pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. The single rate of 10 percent without further qualification on the nature of royalties being paid under paragraph 3 of Article 12 does not apply to royalties paid by Coral Bay from November 11, 2007 and before January 1, 2009 on account of its registration with PEZA in 2002. Moreover, on the question of the royalties being effectively connected with the permanent establishment of Sumitomo Metal in the Philippines under paragraph 5, Article 12 of the treaty, this is not the case for the representative office of Sumitomo Metal in the Philippines since Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Sumitomo Metal Philippine Representative Office was not a material factor in the realization of royalties paid by Coral Bay to Sumitomo Metal. The royalties were not realized in the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office and the royalties were not used, or held for use, in the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. This being the case, royalties paid by Coral Bay to Sumitomo Metal are clearly subject to income tax at the rate of 25 percent (from November 11, 2007 and before January 1, 2009) and 10 percent (from January 1, 2009 and thereafter),as earlier ruled. CaDSHE B. On documentary stamp tax Furthermore, under Section 179 of the Tax Code, the Loan Agreement, the Term Loan Agreement and the Facility Letters between Coral Bay and Sojitz, Sumitomo Metal and Sumitomo Bank are subject to documentary stamp tax based on the amount of loans and advances granted to Coral Bay, 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." C. On value-added tax Finally, under Section 108 (A) (1) of the Tax Code, royalties paid by Coral Bay to Sumitomo Metal and Sumitomo Chemicals, being payments for the use of intangible properties in the Philippines (process and know-how) are subject to value-added tax ("VAT"),to wit: "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, 5 raise the rate of value-added tax to twelve percent (12%)..." However, since Coral Bay is registered with PEZA and covered by the provisions of Republic Act No. 7916, the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." Accordingly, since Coral Bay is not subject to VAT directly on its sale of goods and supply of services to its customers, and indirectly on its purchase of goods and services when such purchase is subject to VAT, such royalties paid by Coral Bay to Sumitomo Metal and Sumitomo Chemicals, being foreign corporations and not VAT-registered taxpayers, shall be exempt from VAT instead of being subject to VAT at zero percent. 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. HIAESC 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 the 15th Floor, 6788 Ayala Avenue, Makati City, Philippines. 3. Situated at 7th and 8th Floors, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. 4. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, The Philippine Economic Zone Authority (PEZA), and for Other Purposes. 5. The VAT rate was increased to 12 percent beginning 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.