ITAD BIR Ruling No. 170-12

April 20, 2012 ITAD BIR RULING NO. 170-12 Article 11 (Interest) Philippines-Malaysia tax treaty S.E. Industries (Philippines), Inc. 12-C, 1st Avenue corner Sta. Teresita Drive Bagumbayan, Taguig City Attention: Necita G. Doyugan Finance and Administrative Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 30, 2009 requesting confirmation that interest paid by S.E. Industries (Philippines), Inc. ("S.E. Industries") to Super Enterprise Sdn. Bhd. ("Super Enterprise") is subject to preferential treatment pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippine-Malaysia tax treaty") . TAcDHS Facts Super Enterprise is a corporation organized and existing under the laws of Malaysia based on its Memorandum and Articles of Association. Super Enterprise is situated at Lot 9, Jalan E1/1, Kawasan Perusahaan Taman Ehsan, 52100 Kepong, Kuala Lumpur, Malaysia. Super Enterprise is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 4, 2009. On the other hand, S.E. Industries is a domestic corporation situated at 12-C, 1st Avenue corner Sta. Teresita Drive Bagumbayan, Taguig City, Philippines. SCHcaT Based on the letter issued by Super Enterprise to S.E. Industries on November 4, 2008, Super Enterprise extended to S.E. Industries a three-year hire purchase sum of 1,377,000.00 Malaysian ringgits to finance the purchase of one unit of New Iwasaki LR3VT-7HD (Offline) Label Printing Machine ("Machinery") . The Machinery was purchased and originally financed by Orix Credit Malaysia Sdn. Bhd. (of 12th Floor, Menara Promet, Jalan Sultan Ismail, Kuala Lumpur, Malaysia) in response to an offer made by Super Enterprise on October 23, 2006. Iwasaki International, Inc. (of 5-6-14 Mizuhai, Higashi-Osaka, Osaka, Japan) supplied the Machinery under Commercial Invoice No. S-201002 dated October 2, 2008, which was delivered to S.E. Industries on October 21, 2008 under Billing and Arrival Notice No. 4/810/012057 dated October 21, 2008. The Machinery will be paid by making 36 equal monthly payments of 43,758.00 Malaysian ringgits to Super Enterprise at the rate of interest of 4.8 percent per annum, to wit: Due Date Amortization Principal Interest (in Malaysian (at 4.80 percent ringgits) per annum) 1 11/23/2008 43,758.00 33,039.73 10,718.27 2 12/23/2008 43,758.00 33,337.46 10,420.54 3 01/23/2009 43,758.00 33,635.19 10,122.81 4 02/23/2009 43,758.00 33,932.92 9,825.08 5 03/23/2009 43,758.00 34,230.65 9,527.35 6 04/23/2009 43,758.00 34,528.38 9,229.62 7 05/23/2009 43,758.00 34,826.11 8,931.89 8 06/23/2009 43,758.00 35,123.84 8,634.16 9 07/23/2009 43,758.00 35,421.57 8,336.43 10 08/23/2009 43,758.00 35,719.30 8,038.70 11 09/23/2009 43,758.00 36,017.30 7,740.70 12 10/23/2009 43,758.00 36,314.76 7,443.24 13 11/23/2009 43,758.00 36,612.49 7,145.51 14 12/23/2009 43,758.00 36,910.22 6,847.78 15 01/23/2010 43,758.00 37,207.95 6,550.05 16 02/23/2010 43,758.00 37,505.68 6,252.32 17 03/23/2010 43,758.00 37,803.41 5,954.59 18 04/23/2010 43,758.00 38,101.14 5,656.86 19 05/23/2010 43,758.00 38,398.86 5,359.14 20 06/23/2010 43,758.00 38,696.59 5,061.41 21 07/23/2010 43,758.00 38,994.32 4,763.68 22 08/23/2010 43,758.00 39,292.05 4,465.95 23 09/23/2010 43,758.00 39,589.78 4,168.22 24 10/23/2010 43,758.00 39,887.51 3,870.49 25 11/23/2010 43,758.00 40,185.24 3,572.76 26 12/23/2010 43,758.00 40,482,97 3,275.03 27 01/23/2011 43,758.00 40,780.70 2,977.30 28 02/23/2011 43,758.00 41,078.43 2,679.57 29 03/23/2011 43,758.00 41,376.16 2,381.84 30 04/23/2011 43,758.00 41,673.89 2,084.11 31 05/23/2011 43,758.00 41,971.62 1,786.38 32 06/23/2011 43,758.00 42,269.35 1,488.65 33 07/23/2011 43,758.00 42,567.08 1,190.92 34 08/23/2011 43,758.00 42,864.81 893.19 35 09/23/2011 43,758.00 43,162.54 595.46 36 10/23/2011 43,758.00 43,460.27 297.73 Total 1,575,288.00 1,336,517.30 198,287.73 ========== ========== ========= Ruling 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: "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: SEIDAC " 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 to 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 was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. ATICcS 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) . In view of the foregoing, since interest on the subject Machinery sold to S.E. Industries on credit will be paid for 36 months from November 23, 2008 to October 23, 2011 , and the subject TTRA was filed only on July 30, 2009 , this Office hereby DENIES interest paid by S.E. Industries to Super Enterprise before August 14, 2009 , being the fifteenth day after the date of filing of the TTRA, pursuant to Section III (2) of RMO 1-2000. Accordingly, such interest shall be subject to income tax at the rate of 20 percent of the gross amount thereof under Section 28 (B) (5) (c) 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. xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (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, pursuant to the same Section III (2) of RMO 1-2000, interest paid by S.E. Industries to Super Enterprise on August 14, 2009 and thereafter shall be subject to income tax at the reduced rate of 15 percent of the gross amount thereof under paragraph 2, Article 11 of the Philippines-Malaysia tax treaty, to wit: "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 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 15 per cent of the gross amount of the interest." (Emphasis ours) With respect to the interest at hand, the term "interest" as used in tax treaties is not confined solely to income from money lent but to all other types of debt-claims, as emphasized in paragraph 6, Article 11 of the Philippines-Malaysia tax treaty, to wit: DcSTaC "6. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent according to the taxation laws of the Contracting State in which the income arises." (Emphasis ours) This is also recognized in the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) , to wit: "Interest on sales on credit 7.8 The disadvantages described in paragraph 7.1 also arise frequently in the case of sales on credit of equipment and other commercial credit sales. The supplier in such cases very often merely passes on to the customer, without any additional charge, the price he will himself have had to pay to a bank or an export finance agency to finance the credit. In these cases, the interest is more an element of the selling price than income from invested capital. In fact, in many cases, the interest incorporated in the amounts of instalments to be paid will be difficult to separate from the actual sale price. States may therefore wish to include interest arising from such sales on credit in a paragraph providing for exemption of certain interest from taxation in the State of source, which they can do by adding the following subparagraph: e) if the interest is paid with respect to indebtedness arising as a consequence of the sale on credit of any equipment, merchandise or services; 7.9 The types of sales on credit referred to in this suggested provision comprise not only sales of complete units, but also sales of separate components thereof. Sales financed through a general line of credit provided by seller to a customer constitute sales on credit as well for the purposes of the provision. Also, it is immaterial whether the interest is stipulated separately in addition to the sale price or is included from the outset in the price payable by instalments. (Pages 209-210) Apparently, the proposal to exempt interest on sales of credit of any equipment, merchandise or services is not adopted in Article 11 of the Philippines-Malaysia tax treaty. Finally, under Section 179 of the Tax Code, the letter issued by Super Enterprise to S.E. Industries on November 4, 2008, being effectively a debt instrument , is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of the Machinery (equivalent in Philippine pesos of 1,377,000.00 Malaysian ringgits) financed by Super Enterprise in favor of S.E. Industries , to wit: TDCaSE "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 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