ITAD BIR Ruling No. 213-12

May 28, 2012 ITAD BIR RULING NO. 213-12 Articles 5 and 22, Philippines-Japan tax treaty, as amended Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 7, 2007 requesting confirmation that guarantee fees paid by Coral Bay Nickel Corporation ("Coral Bay") to Mitsui and Company Ltd. ("Mitsui") and Sumitomo Metal Mining Company Ltd. ("Sumitomo Metal") are exempt from income tax 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"), as amended by a Protocol 1 effective January 1, 2009. Facts Mitsui is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Kojimachi Tax Office in Japan on June 8, 2007. Mitsui is situated at 1-2-1, Ohtemachi, Chiyoda-ku, Tokyo, Japan. Mitsui is licensed by the Securities and Exchange Commission ("SEC") to engage in business in the Philippines under Company Registration No. F-490 issued on March 17, 1967, based on the Certificate of Corporate Filing/Information issued on August 22, 2007. Sumitomo Metal is a corporation organized and existing under the laws of Japan and is a resident thereof based on the Certificate of Residence issued by the Shiba Tax Office in Japan on May 30, 2007. Sumitomo Metal is situated at 11-3, 5-chome, Shimbashi, Minato-ku, Tokyo, Japan. Based on the letters of the Law Offices of V.E. del Rosario and Associates to the SEC on December 20, 1984, March 13 and October 12, 1987, and November 3, 2008, Sumitomo Metal is licensed by the SEC to establish a representative office in the Philippines under Company Registration No. 620 issued on December 18, 1973. A petition to cancel such license was filed on October 6, 1987 and which was not acted upon by the SEC to date. Coral Bay is a domestic corporation situated at the 24th Floor, Pacific Star Building, Makati Avenue corner Sen. Gil Puyat Avenue, Makati City, Philippines. Coral Bay is registered with the Board of Investments ("BOI") as a pioneer enterprise engaged in the production of mixed sulphides of nickel and cobalt under Certificate of Registration No. EP 2002-089 issued on June 27, 2002. Coral Bay is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise engaged in the production of mixed sulphides of nickel and cobalt under Certificate of Registration No. 02-072 issued on December 27, 2002. HICSTa On October 25, 2002, Coral Bay and Mitsui entered into an Indemnity Agreement for Guarantee where Mitsui agreed to provide guarantee to Coral Bay as a condition for Coral Bay to secure a loan from the Japan Bank for International Cooperation ("JBIC") amounting US$70,315,000.00. JBIC is a corporation organized and existing under the laws of Japan, situated at 4-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo, Japan. Under the Agreement, Mitsui guarantees the payment of 9/41 of the aggregate of the loan and the interests and other related costs and expenses thereon. In consideration, Coral Bay will pay a guarantee fee to Mitsui equivalent to 0.5 percent of 9/41 of the average of the unpaid principal balance of the loan through a period of six months to the payment of the guarantee fee. The guarantee fee will be paid on February 21 and August 21 of every year. Based on the Certification issued by the General Manager of the branch office in the Philippines of Mitsui ("Mitsui Philippine Branch") on April 15, 2011, Mitsui Philippine Branch is not a material factor in the realization of the guarantee fees paid by Coral Bay to Mitsui, the fees are not realized in or effectively connected with the ordinary course of trade or business of Mitsui Philippine Branch, and the fees are not used in, or held for use in, the conduct of the trade or business of Mitsui Philippine Branch. Mitsui Philippine Branch is situated at 36th Floor, GT Tower International, 6815 Ayala Avenue, Makati City, Philippines. On October 25, 2002, Coral Bay and Sumitomo Metal also entered into an Indemnity Agreement for Guarantee where Sumitomo Metal agreed to provide guarantee to Coral Bay as a condition for Coral Bay to secure a loan from JBIC. Under the Agreement, Sumitomo Metal guarantees the payment of 32/41 of the aggregate of the loan and the interests and other related costs and expenses thereon. In consideration, Coral Bay will pay a guarantee fee to Mitsui equivalent to 0.5 percent of 32/41 of the average of the unpaid principal balance of the loan through a period of six months to the payment of the guarantee fee. The guarantee fee will be paid on February 21 and August 21 of every year. Based on the Certification issued by the General Manager of Sumitomo Metal on March 2, 2011, the representative office in the Philippines of Sumitomo Metal ("Sumitomo Metal Philippine Representative Office") is not a material factor in the realization of the guarantee fees paid by Coral Bay to Sumitomo Metal, the fees are not realized in or effectively connected with the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office, and the fees are not used in, or held for use in, the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. CIAHaT 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: "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 . cSIHCA 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 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. 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 Indemnity Agreements for Guarantee between Coral Bay and Mitsui and Coral Bay and Sumitomo Metal took effect on October 25, 2002, which called for Coral Bay to pay guarantee fees to Mitsui and Sumitomo Metal every February 21 and August 21 of the following years for an indefinite period, but since the subject TTRA was filed on September 7, 2007, this Office hereby DENIES relief on those fees paid before the fifteenth day following the date of filing of the TTRA or on September 22, 2007, pursuant to Section III (2) of RMO 1-2000. Accordingly, these fees shall be subject to income tax at the rate under Section 28 (B) (1) 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. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." HcDATC On the other hand, guarantee fees paid by Coral Bay to Mitsui and Sumitomo Metal on September 22, 2007 and thereafter are subject to relief under Article 22 of the Philippines-Japan tax treaty, to wit: "Article 22 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State. 2. The provisions of the preceding paragraph shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income 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." Article 22 is a residual article which governs the taxation of income of an enterprise which is not readily covered by the primary articles of the tax treaty, namely, income from immovable property (Article 6), business profits (Article 7), shipping and air transport (Article 8), dividends (Article 10), interest (Article 11), royalties (Article 12) and capital gains (Article 13). The act of providing guarantee by Mitsui and Sumitomo Metal to allow Coral Bay to secure a loan from JBIC was consummated by way of Mitsui and Sumitomo Metal entering into Indemnity Agreements for Guarantee with Coral Bay. This act cannot be deemed as the provision of services, the sale of goods or merchandise, the lease of intangible property and equipment, the grant of loans, etc., where income arising therefrom falls within those covered by the primary articles of the treaty. Under Article 22, such guarantee fees paid to Mitsui and Sumitomo Metal are taxable only in Japan, unless they are effectively connected with a permanent establishment which Mitsui and Sumitomo Metal has in the Philippines; in this case, the guarantee fees may be taxed in the Philippines. Relative to a permanent establishment, Mitsui and Sumitomo Metal have permanent establishment in the Philippines by reason that they have a branch or an office in the Philippines, under paragraph 2, Article 5, to wit: caHASI "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;" On whether the guarantee fees are effectively connected with the permanent establishments of Mitsui and Sumitomo Metal, this is not the case since: 1. Mitsui Philippine Branch is not a material factor in the realization of the guarantee fees paid by Coral Bay to Mitsui, the fees are not realized in or effectively connected with the ordinary course of trade or business of Mitsui Philippine Branch, and the fees are not used in, or held for use in, the conduct of the trade or business of Mitsui Philippine Branch ; and 2. Sumitomo Metal Philippine Representative Office has been dormant and has not been operational since May 14, 1987. Therefore, Sumitomo Metal Philippine Representative Office cannot be a material factor in the realization of the guarantee fees paid by Coral Bay to Sumitomo Metal, the fees cannot be realized in or effectively connected with the ordinary course of trade or business of Sumitomo Metal Philippine Representative Office, and the fees cannot be used in, or held for use in, the conduct of the trade or business of Sumitomo Metal Philippine Representative Office. Accordingly, since the guarantee fees paid by Coral Bay to Mitsui and Sumitomo Metal under the Indemnity Agreements for Guarantee are not effectively connected with Mitsui Philippine Branch and Sumitomo Metal Philippine Representative Office, such fees paid on September 22, 2007 and thereafter are exempt from income tax in the Philippines, pursuant to paragraphs 1 and 2, Article 22, in relation to paragraph 2, Article 5, of the Philippines-Japan tax treaty. DIETcH 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.