ITAD BIR Ruling No. 260-12

June 14, 2012 ITAD BIR RULING NO. 260-12 Sycip Salazar Hernandez and Gatmaitan Attorneys-at-Law SSHG Law Centre 105 Paseo De Roxas Makati City Attention: Hector M. de Leon, Jr. Hiyasmin H. Lapitan Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on March 2, 2010 requesting confirmation that service fees paid by CBK Power Company Ltd. ("CBK Power") to TurboCare, Inc. ("TurboCare") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income. TurboCare is a foreign corporation in the United States located at 2140 Westover Road, Chicopee, Massachusetts, United States. It is not registered as a corporation or partnership in the Philippines. On the other hand, CBK Power is a domestic corporation located at 29th Floor, LKG Tower, 6801 Ayala Avenue, Makati City, Philippines. On August 31, 2009, CBK Power and TurboCare entered into an Award of the Order and Contract Agreement where CBK Power awarded a contract to TurboCare on the rewinding and the reconditioning of its hydro-generator and stator in the Philippines. In consideration, CBK Power will pay service fees to CBK Power totaling $4,690,791.00. The work was carried out from September 2009 to February 2010 by designated personnel of TurboCare. The service fees were paid in installment as follows: Date of Payment Amount (in Pesos) September 1, 2009 71,195,816.25 September 1, 2009 18,425,940.00 October 8, 2009 4,859,502.28 October 20, 2009 4,890,880.90 December 4, 2009 9,754,434.05 December 22, 2009 22,295,432.45 December 22, 2009 23,570,546.23 January 4, 2010 22,036,462.06 January 18, 2010 18,617,131.80 Total 195,646,146.02 ============ 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) CHATcE 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." (Emphasis ours) This decision was upheld by the Supreme Court in Resolution G.R. No. 168531 on 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 service fees subject of the Agreement were paid by CBK Power to TurboCare in September 2009 to January 2010, and the relevant TTRA was filed later on March 2, 2010, this Office hereby DENIES relief on such fees for having the TTRA not filed at least fifteen days before the payment of income as prescribed in RMO 1-2000. Accordingly, said fees shall be subject to income tax at the rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997, 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%)." Please be guided accordingly. HaTAEc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue