ITAD BIR Ruling No. 169-12

April 20, 2012 ITAD BIR RULING NO. 169-12 Article 11 (Interest) Philippines-Switzerland tax treaty Buergli Pharma, Inc. Unit 204, 2nd Floor, One Corporate Plaza 845 Arnaiz Avenue, Legaspi Village Makati City Attention: Reiner W. Gloor Chairman Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 19, 2011 requesting confirmation that interest paid by Buergli Pharma, Inc. ("Buergli Pharma") to Birgli AG ("Birgli") is subject to income tax at the rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . Facts Birgli is a corporation organized and existing under the laws of Switzerland and is a resident thereof based on the Certificate of Residence issued by the Tax Administration of Switzerland on July 5, 2011. Birgli is situated at Baarerstrasse 8, CH-6300 Zug, Switzerland. Birgli 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 May 17, 2011. On the other hand, Buergli Pharma is a domestic corporation situated at Unit 204, 2nd Floor, One Corporate Plaza, 845 Arnaiz Avenue, Legaspi Village, Makati City, Philippines. On July 5, 2011, Buergli Pharma and Birgli entered into a Loan Agreement where Birgli granted a loan to Buergli Pharma of 181,386.25 Swiss francs as its working capital. The loan was granted previously to Buergli Pharma on the following dates: Date Amount March 6, 2008 90,000.00 June 10, 2008 30,000.00 December 11, 2008 9,938.25 June 18, 2009 38,448.00 September 29, 2010 13,000.00 Total (as of December 31, 2010) 181,386.25 ========= The loan bears interest at 5.50 percent per annum in 2008, 4.75 percent per annum in 2009 and 4.50 percent per annum in 2010. Interest is payable semiannually on June 30 and December 31 every year. Repayment of the principal of loan will be requested by Birgli from Buergli Pharma. As of December 31, 2010, the outstanding principal of the loan is 181,386.25 Swiss francs. IcaHCS With respect to the first and third tranches of the loan, based on the Certifications issued by the Manager of Unionbank 1 on October 5, 2011, the amount of 89,815.00 Swiss francs (P3,579,012.94) and $8,702.92 (P389,634.79) was credited to the account of Buergli Pharma with the bank on March 12 and December 11, 2008, respectively. With respect to the second tranche of the loan, based on the Certification issued by the Executive Director of Union Bank of Switzerland 2 on September 30, 2011, the amount of 30,000.00 Swiss francs was remitted to Buergli Pharma on June 10, 2008 through Andre Rioult of 134 Valhalla Street, Pasay City, Philippines. With respect to the fourth and fifth tranches of the loan, based on the Certification issued by Bank Brienz Oberhasli AG 3 on September 12, 2011, the amount of 38,448.00 and 13,000.00 Swiss francs was remitted to Vifor SA (of Route de Moncor 10, CH-1752 Villars sur Glane, Switzerland) on June 18, 2009 and September 29, 2010, respectively. Vifor SA sold Perskindol Classic Gel and Perskindol Classic Spray to Buergli Pharma under Invoice No. 277948 dated September 9, 2008 and Invoice No. 295613 dated June 12, 2009 amounting 38,448.00 and 37,934.00 Swiss francs, respectively. The fourth and fifth tranches were utilized as partial payment to the products sold to Buergli Pharma. Ruling In reply, 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 which 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 first taxable event subject of the TTRA, 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. EcTDCI 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 which accrued before November 4, 2010, any availment of relief shall be preceded by an application filed at ITAD at least 15 days before the intended transaction or payment of income, to wit: "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 . AaHcIT 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 was upheld by the Supreme Court in a 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 subject TTRA was filed on May 19, 2011 , and the first tranche of the loan subject of the Loan Agreement was granted to Buergli Pharma by Birgli on March 6, 2008, this Office hereby DENIES relief on interest paid by Buergli Pharma to Birgli on and before the filing of the TTRA on May 19, 2011 , 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. 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 on May 20, 2011 and thereafter is subject to relief under paragraph 2, Article 11 of the Philippines-Switzerland tax treaty, to wit: cIECTH "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting 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 10 per cent of the gross amount of the interest." Under Article 11, interest arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 10 percent. Accordingly, considering that Birgli is a resident of Switzerland, interest paid by Buergli Pharma to Birgli under the Loan Agreement and made on May 20, 2011 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Switzerland tax treaty. Furthermore, under Section 179 of the Tax Code, the Loan Agreement, being a debt-instrument, is subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan, 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. AIcaDC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Situated at Unionbank Plaza, Meralco Avenue corner Onyx and Sapphire Roads, Ortigas Center, Pasig City, Philippines. 2. With postal address at P.O. Box 6301 Zug, Switzerland. 3. Situated at 3855 Brienz, Haupstrasse, Germany.