ITAD BIR Ruling No. 204-15

June 5, 2015 ITAD BIR RULING NO. 204-15 Article 5 (Permanent Establishment) and Protocol Philippines-Japan tax treaty Mizuho Corporate Bank, LTD.-Manila Branch 26th Floor Citibank Tower, Valero corner Villar Streets Salcedo Village, Makati City Attention: Ichiro Tada General Manager Gentlemen : This refers to your application for relief from double taxation dated October 5, 2012, requesting confirmation that the branch profits to be remitted by the branch office, Mizuho Corporate Bank, Ltd.-Manila Branch (hereinafter referred to as " Mizuho Manila ") of Mizuho Corporate Bank, Ltd. ("Mizuho JP") shall be subject to the preferential tax rate of 10% under the Protocol of 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 as amended by a Protocol 1 (" Philippines-Japan tax treaty "). It is represented that Mizuho JP is a corporation duly organized and existing under the laws of Japan with principal office located at 1-3-3 Marunouchi, Chiyoda-ku, Tokyo, Japan, based on the Certificate of Residence issued by the tax authority of Japan on May 11, 2012; that on the other hand, Mizuho Manila is the Philippine branch office of Mizuho JP , as a consequence of the merger of Fuji Bank Limited with the Dai-ichi Kangyo Bank, Ltd. and The Industrial Bank of Japan, Ltd. based on the Amended SEC License No. AF095-069 issued by the Securities and Exchange Commission dated August 15, 2002. It is also represented that on September 12, 2012, the Bangko Sentral ng Pilipinas has approved the request of Mizuho Manila for clearance to remit to its head office, Mizuho JP , its unremitted branch profits for the fiscal year ended March 31, 2012 amounting to PhP134,557,695, net of profit remittance tax based on the letter of the Acting Deputy Director of the Bangko Sentral ng Pilipinas dated September 14, 2012; and that on October 12, 2012, said remittance was made by Mizuho Manila to Mizuho JP based on the Swift message for the payment order transmitted on even date. In reply, please be informed that Section 28 of the National Internal Revenue Code of 1997 provides as follows, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . (1) In General . Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). cSaATC xxx xxx xxx (5) Tax on Branch Profits Remittances . Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. xxx xxx xxx." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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. xxx xxx xxx" Thus, you invoke item 5 of the Protocol of the Philippines-Japan tax treaty dated February 13, 1980 which provides as follows: "5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 per cent of the amount of the part of such earnings which is remitted abroad . For the purposes of this paragraph, the term 'earnings' means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines. (Emphasis supplied). . ." Under Article 5 of the said treaty, the term "permanent establishment" includes a branch, to wit: cHDAIS "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. (Emphasis supplied) . . ." In view of the above provisions, Mizuho Manila , being a branch of Mizuho JP , qualifies to avail of the 10% preferential tax rate. The branch profit remittance tax, which is an additional tax imposed upon Mizuho Manila , should not exceed 10% of such net income or earnings remitted to its head office. Such being the case, the 15% tax rate prescribed under Section 28 (A) (5) of the Tax Code of 1997 shall not apply to Mizuho Manila . Instead, the preferential tax rate of 10% under the Philippines-Japan tax treaty shall be imposed. 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. Signed on February 13, 1980, and effective January 1, 1981.