ITAD BIR Ruling No. 185-12

May 3, 2012 ITAD BIR RULING NO. 185-12 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-10 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Antonette C. Tionko Principal, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 27, 2010 on behalf of your client, SUMITOMO MITSUI BANKING CORPORATION ("SMBC"), requesting confirmation that interest payments made by FIRST SUMIDEN CIRCUITS, INC. ('FSCI') to SMBC beginning January 1, 2009 are 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 ("Philippines-Japan tax treaty, as amended") . It is represented that SMBC, with address at 1-2 Yurakucho 1-chome, Chiyoda-ku, Tokyo 100-0006, Japan, is a resident corporation of Japan within the meaning of the Philippines-Japan tax treaty as shown in the Certification of Residence issued by District Director of Kojimachi Taxation Office dated April 2, 2010; that it is duly organized and existing under the laws of Japan engaged in the businesses permitted to banks in accordance with the Japanese Banking Law and other laws, and in ancillary and/or related matters as provided for in its Articles of Incorporation; that based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated February 3, 2010, SMBC was issued a license to establish its representative office in the Philippines on March 24, 1995, and pursuant to which it established SUMITOMO MITSUI BANKING CORPORATION Manila Representative Office (formerly, The Sumitomo Bank, Limited) ("SMBC-Manila") for the following purposes: a) to collect and analyze the macro information on Philippines and reporting to the bank's domestic and overseas customers, b) help the bank's domestic and overseas customers to invest in the Philippines and to search Philippine partner, c) prepare for the establishment of a branch or a subsidiary in the future; and that, on the other hand, FSCI is a corporation duly organized and existing under Philippines laws, with address at Ampere Street corner Main Avenue, Light Industry and Science Park, Special Export Processing Zone, Bo. Diezmo, Cabuyao, Laguna, and is registered as a Philippine Economic Zone Authority (PEZA) export enterprise with Certificate of Registration No. 96-048 dated April 18, 1996 subject to the 5% gross income tax under Republic Act No. 7916. It is further represented that FSCI has an existing "Agreement for Loan on Note in Foreign Currency" ("Agreement") with SMBC to cover existing and future loans of the former from the latter; that pursuant to the Agreement, SMBC agrees that if it will grant a new loan or renew an existing one, it shall notify in writing the loan amount required, the length of loan period desired, and other necessary details at least five banking business days prior to the date of loan or renewal; and that insofar as the interest rate on the said loan is concerned, FSCI may select either (1) The rate available to SMBC in Tokyo market from 9:00 am to 3:30 pm, Japan time; (2) The rate available to SMBC in the Eurocurrency market at 11:00 am or closest possible time to 11:00 am, London Time (LIBOR); (3) The rate available to SMBC in the Eurocurrency market from 9:00 am to 3:30 pm, Japan time; or LIBOR. It is also represented, as shown in the various certified copies of Loan Applications and Promissory Notes made by FSCI dating from February 2009 to December 2009, that FSCI has loan balances which were either renewed, increased when additional loans were made or decreased when partial payments were made by FSCI to SMBC; that as of December 7, 2009, the running balance of FSCI's loan from SMBC amounts to US$2,500,000.00. CHDAEc It is finally represented that the transaction subject of the above 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 a judicial appeal of the taxpayers involved. In reply, please be informed that interest income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28, paragraph B, sub-paragraph 5 (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. 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 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, provides: "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: 1 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, the Philippines-Japan tax treaty, as amended by a Protocol which took effect on January 1, 2009, may apply to the interest payments of FSCI to SMBC. Its Article 11 provides: SaHcAC "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), 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, insured 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. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: (a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; (b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 4. 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. EIASDT xxx xxx xxx" Based on the above provisions, interests on foreign loans which are generally taxable in the Philippines at the rate of 20 percent may qualify for a preferential rate of 10 percent of the gross amount thereof if the recipient of the interest is also the beneficial owner thereof. However, the 10 percent preferential tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines to which the subject interest income is effectively connected to. It is worth mentioning that the aforementioned preferential rates may not apply to the instant case considering the SEC grant of license to SMBC to establish a representative office in the Philippines. Relevant thereto, Article 11 (5) of the Philippines-Japan tax treaty, as amended, may now be cited. It provides, viz. : "xxx xxx xxx 5. The provisions of paragraphs (1) and (2) 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, SMBC cannot avail of the preferential rates if it carries on business in the Philippines through a fixed place therein, like in the instant case, a representative office, and, the right to receive interest is effectively connected with such fixed place of business. However, the Chief Representative of SMBC-Manila executed a Sworn Certification on March 3, 2011 to attest that SMBC-Manila is not privy and does not have any participation whatsoever with regard to the Agreement entered into between FSCI and SMBC for which the former pays interest to the latter; and that SMBC-Manila is not a material factor in the realization of interest income by SMBC and said interest shall not be used in the ordinary course of trade or business of SMBC-Manila . Hence, the requested relief for the subject interest may still be availed of. ESDcIA 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 . . ." (Underscoring 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." (Underscoring ours) TADcCS 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. EB Case No. 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6884 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, this Office hereby DENIES relief on the interests paid by FSCI to SMBC before the subject TTRA was filed on July 27, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said interests shall be subject to income tax at the rate provided under Section 28 (B) (1) of the Tax Code of 1997 cited above. However, all interests payable by FSCI to SMBC after 15 days from the date of filing of the TTRA on July 27, 2010, are hereby GRANTED relief and the same shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. Moreover, the said Loan Agreement entered into between FSCI and SMBC 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) on each 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 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. TITLE II TAX ON INCOME.