ITAD BIR Ruling No. 297-11

November 25, 2011 ITAD BIR RULING NO. 297-11 Article 8 (Shipping and Air Transport) Philippines-Korea tax treaty; BIR Ruling No. 51-98 MOF Company, Inc. CTC Building 2232 Roxas Boulevard, Pasay City Attention: Jose Eduardo O. Pea President Gentlemen : This refers to tax treaty relief application ("TTRA") filed on September 23, 2008 requesting confirmation that the Gross Philippine Billings of Hanjin Shipping Company, Ltd. ("Hanjin") are subject to income tax at the rate of 1 1/2% percent 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") . Hanjin had an Agency Agreement with MOF Company, Inc. ("MOF") where Hanjin appointed MOF to perform agency services for Hanjin concerning the latter's shipping business in the Philippines. The Agreement was in effect on January 1 to December 31, 2008. 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: DCIEac " 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 also 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. 7344 dated August 29, 2008), 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 Agency Agreement between MOF and Hanjin was in effect on January 1 to December 31, 2008 , and since the subject TTRA was filed only on September 23, 2008 , this Office hereby DENIES relief on the Gross Philippine Billings of Hanjin earned on January 1 to October 7, 2008 in accordance with Section III (2) of RMO 1-2000, where such income shall be taxed pursuant to Section 28 (A) (3) (b) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: DaEATc "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. . . . (3) International Carrier. An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: . . . (b) International Shipping. 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents." However, in accordance with the same section of the RMO, relief is hereby GRANTED to the Gross Philippine Billings of Hanjin on October 8 (the fifteenth day of filing of the subject TTRA) to December 31, 2008 (the date of termination of the Agreement), where such income shall be taxed at the rate of 1 1/2% percent pursuant to paragraph 3 (a), Article 8 (Shipping and Air Transport) of the Philippines-Korea tax treaty, to wit: "3. Notwithstanding the provisions of paragraph 1, profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State." 1 (BIR Ruling No. 51-98 dated May 5, 1998) Finally, under Section 118 (B) of the Tax Code, the quarterly gross receipts of Hanjin are subject to a percentage tax of 3 percent, to wit: "SEC. 118. Percentage Tax on International Carriers. . . . (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts." SIaHDA Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The Philippines has not yet granted in any of its bilateral tax treaties a most-favored-nation treatment (a lower rate than 1 1/2% percent or exemption) on the Gross Philippine Billings of international shipping.