ITAD BIR Ruling No. 152-14

August 14, 2014 ITAD BIR RULING NO. 152-14 Article 11, Philippines-Japan tax treaty, as amended JSResources Philippines, Inc. 17th Floor 6788 Ayala Avenue corner Oledan Square, Makati City Attention: Takeo Inoue President Gentlemen : This refers to the tax treaty relief application filed on November 21, 2012 requesting confirmation that the interest payments by JSResources Philippines, Inc. ("JSR PH") to JFE Shoji Trade Corporation ("JFE Japan") are subject to a preferential income tax 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that JFE Japan is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan with principal business address at 1-6-20 Doujima Kita ku, Osaka, Japan based on the Residence Certificate issued by the tax authority of Japan on October 22, 2012; that JFE Japan is not registered as a corporation or partnership in the Philippines but has a Manila branch under SEC Registration No. F000000645 based on the Certification issued by the Securities and Exchange Commission on June 21, 2012; and that, on the other hand, JSR PH is a domestic corporation with address at 17th Floor 6788 Ayala Avenue corner Oledan Square, Makati City. It is further represented that on May 30, 2012, JSR PH and JFE Japan entered into the following agreements: HcTSDa Agreement Date Term Loanable Interest Rate Payment Due Amount 1. Revolving May 30, One year, US$1,900,000.00 Japanese Yen Every November 30 each Credit Facility 2012 extended Short term prime year Agreement automatically rate prevailing at for the same the time of actual period unless drawdown date to terminated be quoted by the Bank of Tokyo- Mitsubishi UFJ Ltd. 2. Revolving November November Maximum 1.47% per Maturity date on Loan Facility 29, 2011 29, 2011 principal amount annum November 30, 2012 Agreement to of: November 30, 2012 a.) US$8,440,000 November 29, 2011 to December 10, 2012 b.) US$4,470,000.00 December 11, 2011 to November 30, 2012 and that first payment of the interests for both Agreements were made on December 12, 2012 based on the Certificates of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ-Manila Branch on December 28, 2012. It is finally represented that the issue or transaction subject of the instant application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the President of JSR PH on November 14, 2012. In reply, please be informed that interest income of non-resident foreign corporations not engaged in trade or business in the Philippines shall be subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, which provides: "Section 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; cTECIA xxx xxx xxx" However, such interests may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In this particular case, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1 to 5, Article 11 thereof provide as follows: "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. ACIDTE 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. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 4. The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. aEHTSc 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." In connection with the above-quoted provisions, Article 5 of the Philippines-Japan tax treaty provides: "Article 5 1. For the purposes of this Convention, the term "permanent establishment" means affixed 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. Based on the above provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed, beginning January 1, 2009, 10 percent. Further, such interest is exempt from income tax if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, or by a resident of Japan under certain conditions. The term interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. However, the preferential rate will not apply if the recipient of the interest carries on trade or business in the Philippines through a permanent establishment and the interest is effectively connected with such. cDTHIE In this case, since JFE Japan has a representative office in the Philippines, this constitutes a permanent establishment under paragraphs 1 and 2, Article 5 of the treaty. Nonetheless, interest payments made to JFE Japan may be taxed in the Philippines only if these fees are attributable to the said establishment. Relative thereto, the Supreme Court, in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), ruled that the taxation of income derived by a foreign corporation which has a branch office in the Philippines will be taxed as income of the branch office only if the business transaction that gives rise to the income has been conducted by the foreign corporation through the branch office ,to wit: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation ." (Emphasis added) Accordingly, we do not consider the payments made by JSR PH to JFE Japan as attributable to its representative office in the Philippines it having been represented that the interests are not effectively connected therewith based on the Certification issued by the Manila Branch of JFE Japan on November 14, 2012. In this case, notwithstanding the presence of JSR PH's representative office in the Philippines, and since the interests arising from the Agreements are not in respect of government securities, bonds or debentures at hand, and since JFE Japan is not registered with the Board of Investments as such, and since the interest is not paid to the Government of Japan, etc.,the interest payments to be remitted by JSR PH to JFE Japan are still subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 11 of the Philippines-Japan tax treaty. Finally, the Agreement, being a debt instrument, between JFE Japan and JSR PH is subject to documentary stamp tax equivalent to P1.00 for every P200.00, or fractional part thereof, of the issue price or the amount subject of the Note. Section 179 of the Tax Code, as amended, provides: "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 a fractional part thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ration of its term in number of days to three hundred sixty-five days, provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. TcHCDE xxx xxx xxx" 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.