ITAD BIR Ruling No. 178-12

April 25, 2012 ITAD BIR RULING NO. 178-12 Article 11 Philippines-Japan tax treaty; BIR Ruling No. ITAD 32-10; BIR Ruling No. ITAD 20-10 Ina Research Philippines, Inc. Phase 2, Block 7, Lot 1-A-1 Technology Avenue, Bian, Laguna Attention: Hiroyoshi Ishiguro Finance Director Lisa M. Lalap-Siman Chief Accounting and Finance Section Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 9, 2009 , requesting confirmation that interest paid by Ina Research Philippines, Inc. ("Ina Research Philippines") to Ina Research, Inc. ("Ina Research") (formerly Shinsyu Animal Laboratory Center, Inc. ) is subject to preferential treatment 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 Ina Research is a corporation organized and existing under the laws of Japan based on its Corporate Registration issued by the Legal Affairs Bureau of Nagano in Japan on July 14, 2009. Ina Research is situated at 2148-188 Nishiminowa Ina-shi, Nagano, Japan. Ina Research 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 March 23, 2009. On the other hand, Ina Research Philippines is a domestic corporation situated at Phase 2, Block 7, Lot 1-A-1, Technology Avenue, Bian, Laguna, Philippines. Ina Research Philippines and Ina Research entered into the following International Loan Contracts : Date Principal (in Yen) Purpose Term May 15, 2007 20,000,000.00 Initial operating fund May 15, 2007-March (Loan 1) 31, 2013 September 10, 2007 30,000,000.00 Regular operating fund September 10, 2007- (Loan 2) March 31, 2013 October 21, 2008 50,000,000.00 Construction of building October 21, 2008- (Loan 3) September 30, 2017 The loans bear interest at the rate of 3.5 percent per annum and the principal and the interest of the loan will be paid as follows: Loan 1 Date of Payment Principal Repaid Interest Total (in Yen) Outstanding (in Yen) Principal (in Yen) 09/30/2007 - 266,575.00 266,575.00 20,000,000.00 03/31/2008 - 350,959.00 350,959.00 20,000,000.00 09/30/2008 2,000,000.00 350,959.00 2,350,959.00 18,000,000.00 03/31/2009 2,000,000.00 314,137.00 2,314,137.00 16,000,000.00 09/30/2009 2,000,000.00 280,767.00 2,280,767.00 14,000,000.00 03/31/2010 2,000,000.00 244,329.00 2,244,329.00 12,000,000.00 09/30/2010 2,000,000.00 210,575.00 2,210,575.00 10,000,000.00 03/31/2011 2,000,000.00 174,521.00 2,174,521.00 8,000,000.00 09/30/2011 2,000,000.00 140,384.00 2,140,384.00 6,000,000.00 03/31/2012 2,000,000.00 105,288.00 2,105,288.00 4,000,000.00 09/30/2012 2,000,000.00 70,192.00 2,070,192.00 2,000,000.00 03/31/2013 2,000,000.00 34,904.00 2,034,904.00 - 20,000,000.00 2,543,590.00 22,543,590.00 =========== ========== =========== Loan 2 Date of Payment Principal Repaid Interest Total (in Yen) Outstanding (in Yen) Principal (in Yen) 09/10/2007 - 60,410.00 60,410.00 30,000,000.00 03/31/2008 - 526,438.00 526,438.00 30,000,000.00 09/30/2008 3,000,000.00 526,438.00 3,526,438.00 27,000,000.00 03/31/2009 3,000,000.00 471,205.00 3,471,205.00 24,000,000.00 09/30/2009 3,000,000.00 421,150.00 3,421,150.00 21,000,000.00 03/31/2010 3,000,000.00 366,493.00 3,366,493.00 18,000,000.00 09/30/2010 3,000,000.00 315,863.00 3,315,863.00 15,000,000.00 03/31/2011 3,000,000.00 261,780.00 3,261,780.00 12,000,000.00 09/30/2011 3,000,000.00 210,575.00 3,210,575.00 9,000,000.00 03/31/2012 3,000,000.00 157,931.00 3,157,931.00 6,000,000.00 09/30/2012 3,000,000.00 105,287.00 3,105,287.00 3,000,000.00 03/31/2013 3,000,000.00 52,356.00 3,052,356.00 - 30,000,000.00 3,475,926.00 33,475,926.00 =========== ========== =========== Loan 3 Date of Payment Principal Repaid Interest Total (in Yen) Outstanding (in Yen) Principal (in Yen) 03/31/2009 - 747,945.00 747,945.00 50,000,000.00 09/30/2009 3,000,000.00 877,397.00 3,877,397.00 47,000,000.00 03/31/2010 3,000,000.00 820,247.00 3,820,247.00 44,000,000.00 09/30/2010 3,000,000.00 772,210.00 3,772,210.00 41,000,000.00 03/31/2011 3,000,000.00 715,534.00 3,715,534.00 38,000,000.00 09/30/2011 3,000,000.00 666,822.00 3,666,822.00 35,000,000.00 03/31/2012 3,000,000.00 614,178.00 3,614,178.00 32,000,000.00 09/30/2012 3,000,000.00 561,534.00 3,561,534.00 29,000,000.00 03/31/2013 3,000,000.00 506,110.00 3,506,110.00 26,000,000.00 09/30/2014 3,000,000.00 456,247.00 3,456,247.00 23,000,000.00 03/31/2014 3,000,000.00 401,397.00 3,401,397.00 20,000,000.00 09/30/2015 3,000,000.00 350,959.00 3,350,959.00 17,000,000.00 03/31/2015 3,000,000.00 296,685.00 3,296,685.00 14,000,000.00 09/30/2016 3,000,000.00 245,671.00 3,245,671.00 11,000,000.00 03/31/2016 3,000,000.00 193,027.00 3,193,027.00 8,000,000.00 09/30/2017 3,000,000.00 140,384.00 3,140,384.00 5,000,000.00 03/31/2017 3,000,000.00 97,260.00 3,097,260.00 2,000,000.00 09/30/2017 2,000,000.00 35,096.00 3,035,096.00 - 50,000,000.00 8,488,603.00 58,488,603.00 ============ ========== =========== Based on the Certifications issued by the Business Center Manager of Rizal Commercial Banking Corporation (Sta. Rosa Business Center, Sta. Rosa, Laguna, Philippines) on June 22 and July 10, 2009, the following amounts were remitted and credited to the account of Ina Research Philippines : IEcaHS Loan Date Amount Loan 1 January 18, 2007 20,000,000.00 Loan 2 September 12, 2007 $262,467.20 (29,785,201.99) Loan 2 October 27, 2008 50,000,000.00 Ruling A. Income tax 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: " 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) HIaTDS 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). In view of the foregoing, since the subject TTRA was filed on September 9, 2009 and the interest subject of the Loan Contracts between Ina Research Philippines and Ina Research was paid as early as September 30, 2007 and will be paid on March 31 and September 30 of the succeeding years up to September 30, 2017, this Office hereby DENIES relief on interest paid before and on the fifteenth day of filing the TTRA on September 24, 2009, pursuant to 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 September 25, 2009 and thereafter is subject to relief under paragraph 2, 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: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases." The Protocol, effective January 1, 2009, simplified the rate of tax on interest to 10 percent, to wit: "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." Under Article 11, interest arising in the Philippines and paid to a resident of Japan is, beginning January 1, 2009, subject to income tax at a rate not to exceed 10 percent. HICSTa Accordingly, such interest paid by Ina Research Philippines to Ina Research under the Loan Contracts, on September 25, 2009 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. (BIR Ruling No. ITAD 32-10 dated August 27, 2010; BIR Ruling No. ITAD 20-10 dated August 20, 2010) B. Documentary stamp tax Furthermore, under Section 179 of the Tax Code, the Loan Contracts, being debt-instruments, are subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of each 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. 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.