ITAD BIR Ruling No. 157-13

June 14, 2013 ITAD BIR RULING NO. 157-13 Articles 5 and 11, Philippines-Japan tax treaty Pilipinas Kyohritsu, Inc. Kilometer 75, Laurel Highway Barrio Inosluban, Lipa City Batangas Attention: Ms. Letty V. Amano Senior Adviser Accounting and Finance Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 8, 2010 requesting confirmation that interest paid by Pilipinas Kyohritsu, Inc. ("Pilipinas Kyohritsu") to Sumitomo Mitsui Banking Corporation ("Sumitomo Bank") (formerly The Sumitomo Bank Ltd. ) is 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") . 1 Facts Sumitomo Bank is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and Certification of Residence issued by the Kojimachi Tax Office in Japan on April 2, 2010. Sumitomo Bank is located at 1-2 Yurakucho 1-chome, Chiyoda-ku, Tokyo, Japan. Based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on August 25, 2010, Sumitomo Bank is licensed to establish a representative office in the Philippines on March 24, 1995 under SEC No. AF95000032, and to date, no petition for withdrawal or cancellation of its license has been filed by Sumitomo Bank. On the other hand, Pilipinas Kyohritsu is a domestic corporation located at Kilometer 75, Laurel Highway, Barrio Inosluban, Lipa City, Batangas, Philippines. On October 16, 2009, Pilipinas Kyohritsu and Sumitomo Bank entered into an Agreement on Bank Transactions which govern all banking transactions that may be entered into between the parties, including loan transactions, notes and bills discounts transactions, overdraft transactions, bank acceptance transactions, foreign exchange transactions and financial derivatives transactions. In consideration, Sumitomo Bank will charge Pilipinas Kyohritsu of interest, discount charges, fees including guarantee fees, handling fees, premiums, collection charges and liquidation charges. The Agreement took effect on October 16, 2009 and will be in effect indefinitely, and may at any time be terminated by Pilipinas Kyohritsu provided it has no outstanding obligation to Sumitomo Bank. Based on the Certification issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch ("Bank of Tokyo-Mitsubishi") 2 on October 22, 2010, Sumitomo Bank remitted the following amounts as loans to Pilipinas Kyohritsu and which were credited to the latter's account in Bank of Tokyo-Mitsubishi: HEDSC Date Reference Number Amount (in Dollars) December 9, 2009 697TTP029154 2,000,000.00 March 10, 2010 697TTP021924 1,000,000.00 Based on the Certification issued by Pilipinas Kyohritsu on August 10, 2012, the loans are subject to a fixed rate of interest of 1.00 and 0.70 percent per annum, respectively, and contracted for the purpose of Pilipinas Kyohritsu 's additional working capital. Based on the electronic statements issued by Sumitomo Bank ,the loans were originally drawn on April 15, 2009 and March 10, 2010, respectively. Interest is payable every month, the first payment being on May 15, 2009 ($1,666.66) and April 9, 2010 ($583.33). Based on the Certification issued by the representative office in the Philippines of Sumitomo Bank ("Sumitomo Bank Representative Office") on June 3, 2011: 1. Sumitomo Bank Representative Office is not privy and does not have any participation on the loans granted by Sumitomo Bank to Pilipinas Kyohritsu. 2. Sumitomo Bank Representative Office is not a material factor in the realization of interest derived by Sumitomo Bank of Japan on the loan and such interest is not connected with Sumitomo Bank Representative Office 's business operations. 3. Sumitomo Bank Representative Office is established to (a) to collect and analyze the macro information of the Philippines; (b) report to Sumitomo Bank 's domestic and overseas customers, help these customers to invest in the Philippines, and search for business partners in the Philippines; and (c) prepare for the establishment of Sumitomo Bank 's branch or subsidiary in the future. Said activities are preparatory and auxiliary in nature and do not permit Sumitomo Bank Representative Office to participate in any agreements entered by Sumitomo Bank such as loan agreements. Sumitomo Bank Representative Office is located at 20th Floor, Rufino Pacific Tower, 6784 Ayala Avenue, Makati City, Philippines. Ruling Relative thereto, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") ,which covers income derived or accrued on November 4, 2010 and thereafter, 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 before the intended transaction or payment of income, to wit: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) Also, under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") ,which covers income derived or accrued before November 4, 2010 ,any availment of relief shall be preceded by an application filed at least fifteen days before the intended transaction or payment of income, to wit: DACTSH "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 is 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) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 dated February 18, 2008. Furthermore, the necessary 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 first payment of interest on the two loans subject of the Agreement was made on May 15, 2009 and April 9, 2010 ,but the relevant TTRA was filed only on December 8, 2010 ,this Office hereby DENIES relief on interests paid by Pilipinas Kyohritsu to Sumitomo Bank on or before December 8, 2010 , pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO 1-2000. Accordingly, said interest shall be subject to income tax at the rate of 20 percent under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . aCATSI xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (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 to Sumitomo Bank on December 9, 2010 and thereafter is subject to a reduced rate of income tax under 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. xxx xxx xxx 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 Article 11, interest arising in the Philippines and paid to a resident of Japan is subject to income tax at a rate not to exceed 10 percent. However, the reduction of tax will not apply if the debt-claim in respect of which the interest is paid is effectively connected with a permanent establishment (if the recipient is an enterprise) or a fixed base (if the recipient is an individual performing independent personal services) which the recipient has in the Philippines. Accordingly, since Sumitomo Bank has a representative office in the Philippines, it is deemed to have a permanent establishment , under paragraphs 1 and 2, Article 5 of the Philippines-Japan tax 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: a) a store or other sales outlet; b) a branch; c) an office ;" (Emphasis ours) On whether interest derived by Sumitomo Bank on loans it granted to Pilipinas Kyohritsu is effectively connected with its 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: HIAcCD "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." In view of the foregoing, since the Agreement that gives rise to the interest is purely between Sumitomo Bank and Pilipinas Kyohritsu ,and Sumitomo Bank Representative Office is not privy and does not have any participation on such loans granted by Sumitomo Bank to Pilipinas Kyohritsu ,said interest is not and cannot be effectively connected with Sumitomo Bank Representative Office. This is buttressed by the fact that the loans were remitted directly by Sumitomo Bank to Pilipinas Kyohritsu 's account in Bank of Tokyo-Mitsubishi, and interest payable on these loans was and will be debited to Pilipinas Kyohritsu 's account in Sumitomo Bank ,which will not completely involve Sumitomo Bank Representative Office .Also, taking into account of Sumitomo Bank Representative Office 's business activities as being preparatory and auxiliary in character, these will not permit Sumitomo Bank Representative Office to participate in significant business operations carried out by Sumitomo Bank such as the entering into loan agreements. This being the case, and since Sumitomo Bank is a resident of Japan, interest on loans paid by Pilipinas Kyohritsu to Sumitomo Bank under the Agreement and made on December 9, 2010 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty. Finally, under Section 179 of the National Internal Revenue Code of 1997, as amended, the Loan Agreement are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of each loan (the Philippine peso equivalent of the total loans of $3,000,000.00), 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." 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. As amended by 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. 2. Located at 15th Floor, 6788 Ayala Avenue, Makati City, Philippines.