ITAD BIR Ruling No. 165-13

June 14, 2013 ITAD BIR RULING NO. 165-13 Article 11, Philippines-Japan Tax Treaty, as amended; BIR Ruling No. ITAD-115-11 SURE ECO Energy Phils., Inc. Unit 602 OMM Citra Building San Miguel Avenue, Ortigas Center Pasig 1605 Attention: Hermilia B. Nas Legal Officer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 19, 2011 requesting confirmation that interest payments of SURE ECO Energy Phils., Inc. ("SURE") to MG Leasing Corporation ("MG Leasing") are subject to the preferential withholding tax rate of 10 percent pursuant to Article 11 of the amended 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") . AICTcE It is represented that MG Leasing , with address at 2-1-1, Hitotsubashi, Chiyoda-ku, Tokyo, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty per the Certificate of Residence issued by the District Director of Kanda Tax Office dated March 31, 2011; that it is not registered either as a corporation or partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated June 7, 2011; and that, on the other hand, SURE is a corporation organized and existing under the laws of the Philippines with principal address at Unit 602 OMM Citra Building, San Miguel Avenue, Ortigas Center, Pasig City. It is further represented that on January 14, 2009, MG Leasing and SURE entered into a Payment Assignment Agreement ("Agreement") for the facility of USD2,800,000.00 for the construction and installation of a waste-to-energy facility at its hog farm in San Vicente, Sumilao, Bukidnon, which is owned by MFC and which shall consist of: (a) waste water treatment, mortalities and sludge handling and management facility, and (b) power generation and transmission facility, which shall comply with the operational requirements of all applicable laws and regulations; that SURE shall pay interest on or other sums in arrears to MG Leasing on each Interest Payment Date (March 31, June 30, September 30 and December 31) in each year; that the interest shall be at the rate per annum as certified by SURE representing the aggregate of: (i) the Interest Margin of 3.0% p.a. and (ii) applicable USD Swap Rate; and that the final Interest Payment Date shall be on September 30, 2013. It is finally represented, based on the Sworn Statement by SURE on May 24, 2011, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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; However, said income may be exempt from income tax or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the NIRC 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: aAIcEH 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." Thus, Article 11 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It states: "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 3. 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." Based on the above provisions, interest derived by a corporation which is a resident of Japan may qualify for a preferential rate of 10 percent of the gross amount thereof, under the Philippines-Japan tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , 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 at least 15 days before the intended transaction or payment of income, thus: aDICET "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 was 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) TCacIA This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down 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) . Moreover, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010 , published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: " 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 of 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 Supplied) In view of the foregoing, this Office hereby DENIES relief on interest payments made by SURE to MG Leasing under the subject Agreement made before April 20, 2011 . 1 Accordingly, said interest payments shall be subject to income tax at the rate provided under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. However, relief is hereby GRANTED on interest payments made on April 20, 2011 and thereafter . Thus, they shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to Article 11 (2) of the amended Philippines-Japan tax treaty. ACcaET This ruling is issued on the basis of the foregoing 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. April 20, 2011 is the day after the filing date of the TTRA.