ITAD BIR Ruling No. 183-15

June 3, 2015 ITAD BIR RULING NO. 183-15 Article 11, Philippines-Japan tax treaty Pilipinas Hino Incorporated Industrial Park Road Calubang Industrial Estate Canlubang, Calamba City Attention: Ms. Visitation A. Mejia Accounting Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed August 28, 2012, on behalf of Marubeni Corporation ("Marubeni") requesting confirmation that the interest paid by Pilipinas Hino Incorporated ("Pilipinas Hino") to Marubeni is subject to 10 percent final withholding tax pursuant to 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 , as amended by Protocol 1 ("Philippines-Japan tax treaty, as amended") . It is represented that Marubeni is a corporation organized and existing under the laws of, and is a resident of Japan per Certificate issued by the District Director of Kojimachi Tax Office on August 10, 2012; that Marubeni was issued a license to do business in the Philippines on March 20, 1967, as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on August 17, 2012; that, on the other hand, Pilipinas Hino is a corporation organized and existing under the laws of the Philippines. It is also represented that on August 13, 2012, Pilipinas Hino and Marubeni entered into a Finance Facility Agreement ("Agreement") to purchase of 248 units of middle class buses for Vallacar Group of Companies at any time from March 23, 2013 to August 31, 2014 from Marubeni to finance up to Six Hundred Twenty Five Million JPN Yen (JPY625,000,000) which shall be valid until February 28, 2014; that pursuant to the Agreement the interest applicable to each shipment shall be Nine (9) Month TIBOR Rate quoted by Japanese Banker Association (JBA) plus 3% per annum, ten (10) days prior to each B/L date. It is further represented, based on the affidavit executed by the branch office of Marubeni in the Philippines ("Marubeni-Manila Branch") on July 25, 2013, that (1) Marubeni-Manila Branch has no participation, directly or indirectly, in the granting of loan by its head office to Pilipinas Hino and that the income derived by Marubeni from its loan to Pilipinas Hino is neither attributable to Marubeni-Manila Branch nor paid or course through the latter because any interest income derived from the said loan is directly recorded in the books of Marubeni ; (2) that such interest income derived by Marubeni from its loan to Pilipinas Hino is neither connected with nor resulting from the ordinary course of trade or business of Marubeni-Manila Branch ; and (3) that granting of loan Marubeni to Pilipinas Hino and the interest derived therefrom are neither used nor held for use in the conduct of trade or business of Marubeni-Manila Branch . It is finally represented based on the Sworn Certification issued by the Pilipinas Hino on August 23, 2012, that the interest subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 ("Tax Code of 1997"), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . (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;" However, said interest income may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended, states: "SEC. 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." Accordingly, Article 11 of the Philippines-Japan tax treaty, as amended, which you have invoked, may apply to interest payments of Pilipinas Hino to Marubeni . It provides, viz. : "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, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, 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 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. xxx xxx xxx 5. 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. 6. The provisions of paragraphs 1, 2 and 3 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. xxx xxx xxx" Based on the above provisions, interests on foreign loans are generally taxable in the Philippines at the rate of 20 percent. However, interests 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. However, under paragraph 6, Article 11 of the Philippines-Japan tax treaty, as amended, the reduced rates on interests under paragraph 2 of Article 11 will not apply to such interests paid to Marubeni if they are effectively connected to a permanent establishment which Marubeni has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, Marubeni-Manila Branch , being an office of Marubeni in the Philippines, is considered a permanent establishment of Marubeni in the Philippines, thus: "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 ; 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." Relative thereto, it was held by the Supreme Court in Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989) that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation its conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Accordingly, considering the representation that Marubeni-Manila Branch has neither investments nor any shares of stock in Pilipinas Hino ; that Marubeni-Manila Branch has no participation whatsoever, directly or indirectly, in the acquisition by its head office, Marubeni , of shares in Pilipinas Hino ; that the said income is not paid or coursed through Marubeni-Manila Branch ; that any interest income derived from the said investment is directly recorded in the books of Marubeni ; and that Marubeni-Manila Branch neither uses nor holds for use in the conduct of its trade or business any shares of stock of Marubeni in Pilipinas Hino , then the subject interest income of Marubeni cannot therefore be said to be attributable to Marubeni-Manila Branch . In view of all of the foregoing, and considering that Marubeni 's interest income is not effectively connected to its branch office in the Philippines, Marubeni-Manila Branch , this Office is of the opinion and so holds that the interests derived by Marubeni from Pilipinas Hino are subject tax at the preferential rate of 10 percent of the gross amount of the interests, pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. Moreover, the Loan Agreement entered into between Pilipinas Hino and Marubeni is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, at the rate of One Peso (P1.00) for every Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. 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.