ITAD BIR Ruling No. 308-13

November 13, 2013 ITAD BIR RULING NO. 308-13 Article 11 (Interest), Philippines-Netherlands tax treaty Sycip Salazar Hernandez and Gatmaitan Attorneys-at-Law SyCip Law Center 105 Paseo De Roxas Makati City Attention: Atty. Carina C. Laforteza Atty. Hiyasmin H. Lapitan Atty. Maria Christina C. Ortua Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 6, 2011 requesting confirmation that interest paid by Pagasa Philippines Lending Company, Inc. ("Pagasa Lending") to ASA International NV ("ASA International") is subject to income tax at the rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . cDEICH Facts ASA International is a foreign corporation and a resident of the Netherlands based on its Articles of Incorporation and its Declaration of Residence issued by the Tax Administration of Rijnmond in the Netherlands on September 22, 2011. Based on the same Declaration of Residence, ASA International is a financial institution within the meaning of Article 11 of the Philippines-Netherlands tax treaty. ASA International is located at Amstelplein 1, Amsterdam, the Netherlands. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on August 11, 2011. On the other hand, Pagasa Lending is a domestic corporation located at 2 J. Delgado Street, BF Homes Subdivision, Barangay Holy Spirit, Quezon City, Philippines. In consideration of amounts received from ASA International on several occasions, Pagasa Lending issued the following Bond Certificates to ASA International: Date of Issuance Amount (in Pesos) Interest Rate Date of Maturity per Annum or Redemption November 19, 2008 34,440,000.00 30 percent December 31, 2011 August 14, 2009 71,849,521.00 26 percent August 12, 2012 January 18, 2010 45,860,000.00 12 percent January 17, 2015 July 1, 2010 37,200,000.00 12 percent January 17, 2015 August 5, 2010 45,742,058.28 14 percent August 4, 2015 January 21, 2011 44,278,719.10 12 percent January 21, 2016 The date of maturity or redemption of each bond may be extended for one year. Interest on the bonds will be paid as follows: Interest Period Date of Payment Amount of Bond Subject to Interest (in Pesos) Date of Bond: November 19, 2008 November 20, 2008-November 19, 2009 November 19, 2009 34,440,000.00 (Only 50 percent of interest will be paid on this date.) November 20, 2009-November 19, 2010 November 19, 2010 34,440,000.00 (Only 50 percent of interest will be paid on this date.) November 20, 2010-November 19, 2011 November 19, 2011 34,440,000.00 (Only 50 percent of interest will be paid on this date.) November 20, 2011-December 31, 2011 December 31, 2011 34,440,000.00 (Redemption) (The remaining 50 percent of interest payable on November 19, 2009, 2010 and 2011 will be paid on this date.) Date of Bond: August 14, 2009 August 14, 2009-September 30, 2009 September 30, 2009 71,849,521.00 October 1, 2009-December 31, 2009 December 31, 2009 71,849,521.00 January 1, 2010-March 31, 2010 March 31, 2010 71,849,521.00 April 1, 2010-June 30, 2010 June 30, 2010 71,849,521.00 July 1, 2010-September 30, 2010 September 30, 2010 71,849,521.00 October 1, 2010-December 31, 2010 December 31, 2010 71,849,521.00 January 1, 2011-March 31, 2011 March 31, 2011 71,849,521.00 April 1, 2011-June 30, 2011 June 30, 2011 71,849,521.00 July 1, 2011-September 30, 2011 September 30, 2011 71,849,521.00 October 1, 2011-December 31, 2011 December 31, 2011 71,849,521.00 January 1, 2012-March 31, 2012 March 31, 2012 71,849,521.00 April 1, 2012-June 30, 2012 June 30, 2012 71,849,521.00 July 1, 2012-August 12, 2012 (Redemption) August 12, 2012 71,849,521.00 Date of Bond: January 18, 2010 January 18, 2010-January 17, 2011 January 17, 2015 45,860,000.00 January 18, 2011-January 17, 2012 January 17, 2015 45,860,000.00 January 18, 2012-January 17, 2013 January 17, 2015 45,860,000.00 January 18, 2013-January 17, 2014 January 17, 2015 45,860,000.00 January 18, 2014-January 17, 2015 January 17, 2015 45,860,000.00 (Redemption) Date of Bond: July 1, 2010 July 1, 2010-June 30, 2011 January 17, 2015 37,200,000.00 July 1, 2011-June 30, 2012 January 17, 2015 37,200,000.00 July 1, 2012-June 30, 2013 January 17, 2015 37,200,000.00 July 1, 2013-June 30, 2014 January 17, 2015 37,200,000.00 July 1, 2014-January 17, 2015 (Redemption) January 17, 2015 37,200,000.00 Date of Bond: August 5, 2010 August 5, 2010-August 4, 2011 August 4, 2015 45,742,058.28 August 5, 2011-August 4, 2012 August 4, 2015 45,742,058.28 August 5, 2012-August 4, 2013 August 4, 2015 45,742,058.28 August 5, 2013-August 4, 2014 August 4, 2015 45,742,058.28 August 5, 2014-August 4, 2015 (Redemption) August 4, 2015 45,742,058.28 Date of Bond: January 21, 2011 January 21, 2011-December 31, 2011 January 21, 2016 44,278,719.10 January 1, 2012-March 31, 2012 January 21, 2016 44,278,719.10 April 1, 2012-June 30, 2012 January 21, 2016 44,278,719.10 July 1, 2012-September 30, 2012 January 21, 2016 44,278,719.10 October 1, 2012-December 31, 2012 January 21, 2016 44,278,719.10 January 1, 2013-March 31, 2013 January 21, 2016 44,278,719.10 April 1, 2013-June 30, 2013 January 21, 2016 44,278,719.10 July 1, 2013-September 30, 2013 January 21, 2016 44,278,719.10 October 1, 2013-December 31, 2013 January 21, 2016 44,278,719.10 January 1, 2014-March 31, 2014 January 21, 2016 44,278,719.10 April 1, 2014-June 30, 2014 January 21, 2016 44,278,719.10 July 1, 2014-September 30, 2014 January 21, 2016 44,278,719.10 October 1, 2014-December 31, 2014 January 21, 2016 44,278,719.10 January 1, 2015-March 31, 2015 January 21, 2016 44,278,719.10 April 1, 2015-June 30, 2015 January 21, 2016 44,278,719.10 July 1, 2015-September 30, 2015 January 21, 2016 44,278,719.10 October 1, 2015-December 31, 2015 January 21, 2016 44,278,719.10 January 1, 2016-January 21, 2016 (Redemption) January 21, 2016 44,278,719.10 Based on the Certificates of Inward Remittance of Foreign Exchange issued by Standard Chartered Bank 1 on November 18, 2008, November 24, 2009, January 18, 2010, June 21, 2010, August 13, 2010, January 18, 2010, June 9, 2010, August 2, 2010, August 5, 2010, and January 26, 2011, the foregoing amounts were remitted by ASA International to Pagasa Lending 's account at the bank as follows: SAHaTc Date of Remittance Amount Amount (in US Dollars) (in Pesos) November 3, 2008 700,000.00 34,440,000.00 August 13, 2009 1,499,990.00 71,849,521.00 January 18, 2010 1,000,000.00 45,860,000.00 June 9, 2010 800,000.00 37,200,000.00 July 29, 2010 299,992.00 13,739,633.60 July 29, 2010 299,992.00 13,739,633.60 July 29, 2010 299,992.00 13,739,633.60 August 5, 2010 100,092.00 4,523,157.48 January 19, 2011 500,042.00 22,101,856.40 January 21, 2011 500,042.00 22,176,862.70 Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") ,which covers income derived or which accrued on November 4, 2010 and thereafter ,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 before the payment or accrual of such income, to wit: " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) Also, under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") ,which covers income derived or which accrued before November 4, 2010 ,any availment of relief shall be preceded by an application filed at ITAD at least fifteen days before the payment or accrual of such income, to wit: " III. Policies: HcSCED 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) aACHDS This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the necessary 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 first payment of interest subject of the Bond Certificates was made on September 30, 2009 ,but the relevant TTRA was filed only on October 6, 2011 ,this Office hereby DENIES relief on interests paid by Pagasa Lending to ASA International on or before October 6, 2011 , pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO 1-2000. Accordingly, said interests 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 ASA International on October 7, 2011 and thereafter is subject to a reduced rate of income tax under paragraph 2, Article 11 of the Philippines-Netherlands tax treaty, which provides: "Article 11 Interest 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. TaDCEc 2. However, such interest may also be taxed in the 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 if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of the interest in all other cases." Under Article 11, interest arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment; on any loan of whatever kind granted by a bank, or any other financial institution; or in respect of public issues of bonds, debentures or similar obligations, and (b) 15 percent in all other cases. Accordingly, since ASA International is a financial institution in the Netherlands, such interest paid by Pagasa Lending to ASA International on October 7, 2011 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2 (a) (ii), Article 11 of the Philippines-Netherlands tax treaty. Furthermore, under Section 179 of the Tax Code, the Bond Certificates, being debt instruments, are subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of each bond, to wit: "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." 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. DSAacC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at Standard Chartered Bank Building, 6788 Ayala Avenue, Makati City, Philippines.