ITAD BIR Ruling No. 164-13

June 14, 2013 ITAD BIR RULING NO. 164-13 Article 11, Philippines-Japan tax treaty, as amended Chaves Hechanova & Lim Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas corner Gamboa Streets, Makati City Attention: Atty. Alfredo C. Lim Atty. Maria Regina A. Ruiz Gentlemen : This refers to the tax treaty relief application filed on May 25, 2012 requesting confirmation that the interest payments by Souhatsu Philippines, Inc. ("Souhatsu PH") to Souhatsu Co. Ltd. ("Souhatsu 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") . HSaEAD It is represented that Souhatsu Japan is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan with principal business address at 1-2-1 Tsurmaki, Tama-City, Tokyo based on the Residence Certificate issued by the District Director of Hino Tax Office on February 23, 2012; that Souhatsu Japan is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on January 6, 2012; that, on the other hand, Souhatsu PH is a domestic corporation with address at Units 3 and 4 Lot 7B Greenfield Automotive Park, Special Economic Zone, Sta. Rosa, Laguna; and that Souhatsu PH is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under Certificate of Registration No. 11-55 issued by PEZA on August 25, 2011. It is further represented that on October 25, 2011, Souhatsu PH and Souhatsu Japan entered into a Loan Agreement ("Agreement") whereby Souhatsu Japan granted Souhatsu PH a loan in the principal amount of US$200,000.00 with a maturity date on October 10, 2016; that the said loan shall bear interest in an annual fixed rate of 3.5%; that unpaid principal and interests after the maturity date shall accrue default interest at the rate of 0.6% per month until paid; and that as of November 2011 up to November 30, 2012, Souhatsu PH has not remitted payment for the principal and interest to Souhatsu Japan but that beginning November 2011 up to November 2012, Souhatsu PH already remitted to the Bureau of Internal Revenue withholding tax on the interest income at a regular rate of 20 percent based on the Sworn Statement of the Finance and Administrative Manager of Souhatsu PH on December 17, 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 Corporate Secretary of Souhatsu PH on May 24, 2012. In reply, please be informed that Section 14 of Revenue Memorandum Order No. (RMO) 72-2010 2 which took effect on November 4, 2010, provides that: " 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. aSEHDA 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 supplied) In the case of Manila North Tollways Corporation vs. Commissioner of Internal Revenue , 3 the Court of Tax Appeals had the occasion to rule that a prior application for tax treaty relief is required before a taxpayer can avail of the preferential tax treatment under the Philippine tax treaties. Also noteworthy are the objectives of the RMO, to wit: "I. Objectives: This Order is issued to streamline the processing of the tax treaty relief application in order to improve efficiency and service to the taxpayers. Furthermore, it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD). In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty. " (emphasis supplied) In this case, the TTRA was filed only on May 25, 2012 while the interest payments are due since November of 2011. Thus, interest payments made, if any, paid on or before May 25, 2012 are hereby denied for having been filed beyond the reglementary period prescribed under the above-quoted provisions. Said payments 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; ACDIcS xxx xxx xxx" However, for interest payments made on May 26, 2012 and thereafter , 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. 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: STaCcA 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. 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 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; aIcDCH 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. In this case, since Souhatsu Japan is not registered either as a corporation or partnership in the Philippines based on the relevant SEC Certification, then Souhatsu Japan is deemed not to have a permanent establishment in the Philippines. Moreover, since the interests arising from the Agreement are not in respect of government securities, bonds or debentures at hand, and since Souhatsu 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 made by Souhatsu PH to Souhatsu Japan on May 26, 2012 and thereafter are 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 Souhatsu Japan and Souhatsu 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: aASDTE "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. 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. 2. Guidelines on the Processing Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties. 3. CTA Case No. 7864 promulgated April 12, 2011.