ITAD BIR Ruling No. 259-12

June 14, 2012 ITAD BIR RULING NO. 259-12 Article 11 (Interest); Philippines-Korea tax treaty Best Chemicals and Plastics, Inc. BCPI Compound Governor's Drive, Barrio Maduya Carmona, Cavite Attention: Dae Jun Moon Director Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 18, 2007 requesting confirmation that interest paid by Best Chemicals and Plastics, Inc. ("Best Chemicals") to Bexel Corporation ("Bexel") is subject to income tax at the rate of 15 percent rate pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . Facts Bexel is a corporation organized and existing under the laws of Korea based on its Register of Incorporation. Bexel is situated at 261-1 Gongdan-dong, Gumi-si, Kyeongbuk, South Korea. Bexel 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 December 10, 2007. On the other hand, Best Chemicals is a domestic corporation situated at BCPI Compound, Governor's Drive, Barrio Maduya, Carmona, Cavite, Philippines. On June 1, 2006, Best Chemicals and Bexel entered into a Loan Agreement where Bexel granted Best Chemicals a loan of US$1,685,955.74 to be used as its additional operating funds. The loan will be remitted on November 6, 2006. The loan has a maturity period of one year and will be automatically renewed until the full payment thereof. The loan bears interest at the rate of 9 percent per annum. Based on the Certification issued by the Senior Manager of the Bank of the Philippine Islands (Carmona Branch) on January 11, 2008, Best Chemicals received US$1,685,879.92 from Bexel on November 7, 2006, net of applicable banking fees. 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: aCATSI "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) This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the requirement 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 December 18, 2007, and the loan subject of the Loan Agreement was received by Best Chemicals from Bexel on November 7, 2006, and the first payment of the principal and interest on the loan will be made after a period of year or on November 6, 2007, this Office hereby DENIES relief on such interest payments made before January 2, 2008, in accordance with 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) (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. 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." On the other hand, interest paid by Best Chemicals to Bexel on January 2, 2008 and thereafter is subject to relief under paragraphs 1 and 2, Article 11 of the Philippines-Korea tax treaty, to wit: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that 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 public issues of bonds, debentures or similar obligation; and b) 15 per cent of the gross amount of the interest in all other cases." Accordingly, since the interest paid by Best Chemicals to Bexel under the Agreement is not in respect of public issues of bonds, debentures or similar obligation on September 26, 2006, such interest paid on January 2, 2008 and thereafter shall be subject to income tax at the rate of 15 percent. Finally, under Section 179 of the Tax Code, the loan subject of the Loan Agreement is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the loan, to wit: cSaATC "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. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." This ruling is issued on the basis of the actual facts as represented. However, if upon investigation it shall be disclosed that the 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