ITAD BIR Ruling No. 285-12

July 17, 2012 ITAD BIR RULING NO. 285-12 Article 12 (Interest), Philippines-Thailand tax treaty Enkei Philippines, Inc. 104 Industry Drive Carmelray Industrial Park Barangay Canlubang Calamba City, Laguna Attention: Ryusuke Onoki Managing Director Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 27, 2010 requesting confirmation that interest paid by Enkei Philippines, Inc. ("Enkei Philippines") to Enkei Thai Company Ltd. ("Enkei Thailand") is subject to preferential tax treatment pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty") . Facts Enkei Thailand is a corporation organized and existing under the laws of Thailand based on the Certificate issued by the Ministry of Commerce of Thailand on August 2, 2010 and on its Taxpayer Identification Card issued by the Revenue Department of Thailand on June 25, 2008. Enkei Thailand is located at 129 Theparak Road, Village No. 17, Bang Sao Thong Sub-District, Bang Sao Thong District, Samut Prakan, Thailand. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 13, 2010. On the other hand, Enkei Philippines is a domestic corporation located at 104 Industry Drive, Carmelray Industrial Park, Barangay Canlubang, Calamba City, Laguna, Philippines. On March 3, 2010, Enkei Thailand and Enkei Corporation ("Enkei Japan") entered into an Agreement of Receivables Transfer where Enkei Japan ,for valuable consideration, transferred to Enkei Thailand its loan receivables from Enkei Philippines with outstanding principal of 1,060,000,000.00 as of that date. 1 Enkei Japan is a corporation organized and existing under the laws of Japan located at 26th Floor, ACT Tower, 111-2 Itayamachi, Naka-ku, Hamamatsu, Shizuoka, Japan. As a result of the transfer, Enkei Thailand, as the new creditor, will receive the remaining principal and accruing interest on loans granted by Enkei Japan to Enkei Philippines and acknowledged by the latter through the following promissory notes: Date of Principal Interest per Date of Promissory Note (in Yen) Annum Payment June 16, 2005 520,000,000.00 1.7 percent September 30, 2005 December 31, 2005 March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006 March 31, 2007 June 14, 2007 September 30, 2005 600,000,000.00 1.7 percent December 31, 2005 March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006 March 31, 2007 June 14, 2007 September 30, 2007 Total 1,120,000,000.00 ============== Based on the Certification issued by Metropolitan Bank and Trust Company on October 12, 2005, the loan of 520,000,000.00 was remitted and credited to Enkei Philippines' account on June 16, 2005. Based on the Certificate of Inward Remittance issued by Bank of Tokyo-Mitsubishi Ltd. Manila Branch on October 17, 2005, the loan of 600,000,000.00 was remitted and credited to Enkei Philippines' account on September 30, 2005. BIR Ruling No. ITAD 57-06 dated May 22, 2006 ruled that interest paid to Enkei Japan on these loans is subject to a reduced rate of 10 percent and that the promissory notes, being debt instruments, are subject to documentary stamp tax. IcTCHD Although the loans supposedly matured in 2007, it appears that considering their huge total at 1,120,000,000.00, Enkei Philippines has not fully paid them today. As of the date of the Agreement of Receivables Transfer, Enkei Philippines has only reduced the amount by 60,000,000.00 leaving a remaining principal of 1,060,000,000.00. Since the Agreement did not provide for a new interest rate and a new schedule of payment on the unpaid loans, it follows that they continue to bear same rate of 2 percent per annum and that principal and accruing interest thereon remain payable quarterly on March 31, June 30, September 30 and December 31 of the year. Ruling A. Income tax 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 fifteen 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 is 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 is also upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. cIETHa 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. 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 July 27, 2010 and interest subject of the promissory notes are payable quarterly on March 31, June 30, September 30 and December 31 of the year, this Office hereby DENIES relief on interest paid by Enkei Philippines to Enkei Thailand before August 11, 2010, pursuant to 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) (5) (a) 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. (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 to Enkei Thailand on August 11, 2010 and thereafter is subject to relief under paragraph 2, Article 12 of the Philippines-Thailand tax treaty, to wit: "Article 12 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that 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 interest if: (i) it arises in Thailand and is received by Philippine financial institutions (including insurance companies) (ii) it arises in the Philippines in respect of public issues of bonds, debentures or similar obligations; b) 15 per cent of the gross amount of interest if it arises in the Philippines, and c) 25 per cent of the gross amount of interest if it arises in Thailand." Under Article 11, interest arising in the Philippines and paid to a resident of Thailand may be taxed in the Philippines at a rate not to exceed: (a) 10 percent if it is paid in respect of public issues of bonds, debentures or similar obligations; and (b) 15 percent in all other cases. Accordingly, since the interest subject of the Promissory Notes and the Agreement of Receivables Transfer is not paid in respect of public issues of bonds, debentures or similar obligations, such interest paid by Enkei Philippines to Enkei Thailand on August 11, 2010 and thereafter shall be subject to income tax at the rate of 15 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Thailand tax treaty. 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. HacADE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The Agreement also transferred to Enkei Thailand a loan from Enkei (Malasia) Sdn. Bhd. and trade account and non-trade account receivables from Enkei Philippines, Enkei (Malasia) Sdn. Bhd. and PT Enkei Indonesia.