ITAD BIR Ruling No. 156-13

June 14, 2013 ITAD BIR RULING NO. 156-13 Articles 5 and 7, Philippines-Japan tax treaty; Article 11 (Interest), Philippines-Netherlands tax treaty Team Energy Corporation CTC Building 2332 Roxas Boulevard Pasay City Attention: Mr. Kazunobu Takijima Vice President and Controller Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 8, 2007 requesting confirmation that interests paid by Team Energy Corporation ("Team Energy") (formerly Crimson Power Holdings Corporation ) to Marubeni Corporation ("Marubeni"), Nomura Philippine Power Funding Company BV ("Nomura") and Tokyo Electric Power Company International BV ("Tokyo Electric") are subject to income tax at the rate of 15 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") and 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 Marubeni is a foreign corporation in Japan based on its amended Articles of Incorporation. Marubeni is located at 4-2 Ohtemachi 1-chome, Chiyoda-ku, Tokyo, Japan. Based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission ("SEC") on July 20, 2007, Marubeni is licensed to engage in trade or business in the Philippines since March 20, 1967 under Certification No. F-493. Nomura is a foreign corporation and a resident of the Netherlands based on its Residence Certificate issued by the Tax Administration of Amsterdam in the Netherlands on August 10, 2007. Nomura is located at Atrium 1st Floor, Strawinskylaan 3109, 1077 ZX, Amsterdam, Netherlands. Nomura is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the SEC on July 25, 2007. Tokyo Electric is also a foreign corporation in the Netherlands based on the document issued by the Chambers of Commerce of Amsterdam in the Netherlands on June 1, 2007. Tokyo Electric is located at Strawinskylaan 3105, 1077 ZX, Amsterdam, Netherlands. Tokyo Electric is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the SEC on July 25, 2007. On the other hand, Team Energy is a domestic corporation located at the CTC Building, 2332 Roxas Boulevard, Pasay City, Philippines. ATSIED Shareholder Loan Agreement between Team Energy and Marubeni On May 29, 2007, Team Energy and Marubeni entered into a Shareholder Loan Agreement where Marubeni granted Team Energy a loan amounting $24,900,000.00 which was available for drawdown on that date. The loan will be paid in full one business day immediately after the termination date of the Agreement. The loan bears interest at the rate of 12 percent per annum. Based on the Certificate issued by Team Energy on February 26, 2013, it paid the loan as follows: Date of Payment Principal Repaid (in Dollars) Interest Paid (in Dollars) Remitting Bank Receiving Bank Reference Number Jun. 25, 2008 - 2,801,338.49 Mizuho Corporate Bank Ltd. Singapore Branch 1 Mizuho Corporate Bank Ltd. 2 OTT749443004 Jul. 31, 2008 12,500,000.00 - OTT749451690 Dec. 22, 2008 12,400,000.00 795,174.99 OTT749479557 Total 24,900,000.00 3,596,513.48 Based on the Certifications issued by the General Manager of the branch office in the Philippines of Marubeni ("Marubeni Philippine Branch") on August 29 and December 6, 2007, Marubeni Philippine Branch has no participation in any manner, directly or indirectly, with the subject Shareholder Loan Agreement. Any income derived by Marubeni from the transaction is not attributable to Marubeni Philippine Branch nor paid or coursed through it since such income is directly remitted to Marubeni . No portion of the interest will be used in, or held for use in, the conduct of the trade or business of Marubeni Philippine Branch . Marubeni Philippine Branch is located at 7th Floor, L.V. Locsin Building, corner Ayala and Makati Avenues, Makati City, Philippines. Shareholder Loan Agreement between Team Energy and Tokyo Electric On May 29, 2007, Team Energy and Tokyo Electric likewise entered into a Shareholder Loan Agreement where Tokyo Electric granted Team Energy a loan amounting $24,900,000.00 which was available for drawdown on that date. The loan will be paid in full one business day immediately after the termination date of the Agreement. The loan bears interest at the rate of 12 percent per annum. Based on the Certificate issued by Team Energy on February 26, 2013, it paid the loan as follows: Date of Payment Principal Repaid (in Dollars) Interest Paid (in Dollars) Remitting Bank Receiving Bank Reference Number Jun. 25, 2008 - 2,801,338.49 Mizuho Corporate Bank Ltd. Singapore Branch Bank of Tokyo-Mitsubishi UFJ New York Branch 3 OTT749443006 Jul. 31, 2008 12,500,000.00 - OTT749451688 Dec. 22, 2008 12,400,000.00 795,174.99 OTT749479556 Total 24,900,000.00 3,596,513.48 Mezzanine Facility Agreement between Team Energy and Nomura On June 7, 2007, Team Energy and Nomura entered into a Mezzanine Facility Agreement where Nomura granted Team Energy a loan amounting $230,000,000.00 which would be available for drawdown on such date specified by Team Energy in its utilization request to Nomura. The loan bears interest at the rate of 9.25 percent per annum. The loan will be paid as follows: a IED Date of Principal Principal Date of Principal Principal Payment Repaid Subject to Payment Repaid Subject to (in Dollars) Interest (in Dollars) Interest (in Dollars) (in Dollars) Dec. 20, 2007 - 230,000,000.00 Jun. 20, 2016 - 230,000,000.00 Jun. 20, 2008 - 230,000,000.00 Dec. 20, 2016 - 230,000,000.00 Dec. 20, 2008 - 230,000,000.00 Jun. 20, 2017 15,333,333.00 230,000,000.00 Jun. 20, 2009 - 230,000,000.00 Dec. 20, 2017 15,333,333.00 214,666,667.00 Dec. 20, 2009 - 230,000,000.00 Jun. 20, 2018 15,333,334.00 199,333,334.00 Jun. 20, 2010 - 230,000,000.00 Dec. 20, 2018 15,333,333.00 184,000,000.00 Dec. 20, 2010 - 230,000,000.00 Jun. 20, 2019 15,333,333.00 168,666,667.00 Jun. 20, 2011 - 230,000,000.00 Dec. 20, 2019 15,333,334.00 153,333,334.00 Dec. 20, 2011 - 230,000,000.00 Jun. 20, 2020 15,333,333.00 138,000,000.00 Jun. 20, 2012 - 230,000,000.00 Dec. 20, 2020 15,333,333.00 122,666,667.00 Dec. 20, 2012 - 230,000,000.00 Jun. 20, 2021 15,333,334.00 107,333,334.00 Jun. 20, 2013 - 230,000,000.00 Dec. 20, 2021 15,333,333.00 92,000,000.00 Dec. 20, 2013 - 230,000,000.00 Jun. 20, 2022 15,333,333.00 76,666,667.00 Jun. 20, 2014 - 230,000,000.00 Dec. 20, 2022 15,333,334.00 61,333,334.00 Dec. 20, 2014 - 230,000,000.00 Jun. 20, 2023 15,333,333.00 46,000,000.00 Jun. 20, 2015 - 230,000,000.00 Dec. 20, 2023 15,333,333.00 30,666,667.00 Dec. 20, 2015 - 230,000,000.00 Jun. 20, 2024 15,333,334.00 15,333,334.00 Total 230,000,000.00 ============ Based on the utilization request issued by Team Energy to Nomura on June 13, 2007, Team Energy requested to draw $224,000,000.00 from the facility on June 20, 2007. Of this amount, only $214,779,237.00 was received by Team Energy as proceeds after deducting therefrom a commitment fee of $20,763.00 and an arrangement fee of $9,200,000.00. Proof of remittance Based on the Certification issued by Credit Suisse Singapore Branch 4 on June 29, 2007, the following amounts were credited to the account of Team Energy : 1. $24,900,000.00 from Tokyo Electric on June 1, 2007; 2. $24,900,000.00 from Marubeni on June 5, 2007; and 3. $214,779,237.00 from Nomura on June 20, 2007. Ruling Relative thereto, please be informed that since the relevant TTRA was filed at the International Tax Affairs Division ("ITAD") of this Bureau on October 8, 2007, and the first payment of interests subject thereof was and would be made later on December 20, 2007 in the case of Nomura and on June 25, 2008 in the case of Tokyo Electric and Marubeni, such interests paid on those dates and thereafter which were done at least fifteen days after the filing of the TTRA 5 shall be subject 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) , 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) ADCIca Relative thereto, interests paid to Marubeni, Tokyo Electric and Nomura are subject to relief under Article 11 of the Philippines-Japan and -Netherlands tax treaties, which provide: Japan : "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." 6 Netherlands : "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, (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." Under Article 11 of the Philippines-Japan tax treaty, interest 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 interest is paid in respect of government securities, bonds or debentures, and (b) 15 percent in all other cases. Under Article 11 of the Philippines-Netherlands tax treaty, interest arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment; on any loan granted by a bank or a financial institution; or in respect of public issues of bonds, debentures or similar obligations; and (b) 15 percent in all other cases. Accordingly, with respect to interest paid by Team Energy to Marubeni under the Shareholder Loan Agreement on June 25 and December 22, 2008, since the interest is not paid in respect of government securities, bonds or debentures, such interest shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty. ISHCcT With respect to interest paid by Team Energy to Tokyo Electric and Nomura under the Shareholder Loan Agreement and the Mezzanine Facility Agreement, since the interest is not paid in connection with the sale on credit of any industrial, commercial or scientific equipment, nor on any loan granted by a bank or a financial institution, nor in respect of public issues of bonds, debentures or similar obligations, such interest shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 11 of the Philippines-Netherlands tax treaty. However, with respect to interest paid to Marubeni which has a permanent establishment in the Philippines, under paragraph 6, Article 11 of the Philippines-Japan tax treaty, the reduced tax of 15 percent as earlier ruled will not apply if the interest is effectively connected with the permanent establishment, thus: "6. 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 treaty, Marubeni Philippine Branch , being a branch of Marubeni , constitutes the latter's permanent establishment in the Philippines, 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 ;" (Emphasis ours) On the question of income being effectively connected with a permanent establishment, 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." DIESaC Accordingly, considering that Marubeni Philippine Branch has no participation in the Shareholder Loan Agreement that is purely between Team Energy and Marubeni ; that any income derived by Marubeni from the transaction is not attributable to Marubeni Philippine Branch nor paid or coursed through it since such income is directly remitted to Marubeni through the latter's account Mizuho Corporate Bank Ltd. in Japan; and that no portion of the interest is used in, or held for use in, the conduct of the trade or business of Marubeni Philippine Branch , the interest paid by Team Energy to Marubeni is not and cannot be effectively connected with Marubeni Philippine Branch. On this note, such interest shall be subject to a reduced rate of tax of 15 percent as earlier ruled. Finally, under Section 179 of the National Internal Revenue Code of 1997, as amended, the debt instruments in question are subject to documentary stamp tax amounting to P1.00 for every P200.00 (or a fraction thereof) of the amount of loan subject of these instruments (the Philippine peso equivalent of $24,900,000.00 for each Shareholder Loan Agreement with Marubeni and Tokyo Electric and $224,000,000.00 for the amount in the utilization request drawn under the Mezzanine Facility Agreement with Nomura ), 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. SAHEIc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at Hex 13-00 Capital Tower, 168 Robinson Road, Singapore. 2. Located at 4-6-13 Tsukishima Chuo-ku, Tokyo, Japan. 3. Located at 1251 Avenue of the Americas, New York, New York, United States of America. 4. Located at 1 Raffles Link, No. 3 and No. 4-01 South Lobby, Singapore. 5. October 23, 2007 is the fifteenth day of filing the TTRA and the effectivity of the relief sought. 6. The 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 , amended paragraph 2 by simplifying the rate to 10 percent, to wit: "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."