ITAD BIR Ruling No. 315-12

August 10, 2012 ITAD BIR RULING NO. 315-12 Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 21, 2007 requesting confirmation that dividends and royalties paid by JGC Philippines, Inc. ("JGC Philippines") to JGC Corporation ("JGC") are subject to a reduced rate of income tax pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income . JGC is a foreign corporation in Japan located at 2-1 Ohtemachi 2-chome, Chiyoda-ku, Tokyo, Japan. It is licensed to establish a regional operating headquarters in the Philippines in the name of JGC Corporation Manila Regional ROHQ . On the other hand, JGC Philippines is a domestic corporation located at JGC Philippines Building, 2109 Prime Street, Madrigal Business Park, Ayala Alabang, Muntinlupa City, Philippines. JGC holds 322,993 shares of stock of JGC Philippines which account for 95 percent of the latter's capital. JGC Philippines declared cash dividends as follows: Date of Declaration Total Amount Amount (in Pesos) Date of Payment (in Pesos) Paid to JGC March 28, 2006 10,000,000.00 9,500,000.00 March 30, 2006 March 26, 2007 100,000,000.00 95,000,000.00 April 30, 2007 Also, on April 1, 2002, JGC Philippines and JGC entered into a Trademark Licensing Agreement where JGC granted JGC Philippines a non-exclusive right to use its trademark in the conduct of JGC Philippines' business transactions, sales promotion, and project execution in the Philippines and abroad. In consideration, JGC Philippines will pay royalties to JGC Philippines amounting $500,000.00 for 2002, while the amount of royalties for 2003 and thereafter will have to be agreed upon later by the parties. The royalties are computed and payable every six months and due within the first five days of April and October of each year. The Agreement took effect on April 1, 2002 and expired on March 31, 2007. DTAIaH In reply, 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 relief 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 subject of the TTRA, to wit: "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. ETDHaC 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 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 dividends were paid on March 30, 2006 and April 30, 2007 , and the royalties on October 5, 2002 to April 5, 2007 , but the TTRA for this purpose was filed only on September 21, 2007 , this Office hereby DENIES relief on such dividends and royalties paid by JGC Philippines to JGC for having the TTRA filed beyond the prescribed period of at least fifteen days before the payment of income, as required in Section III (2) of RMO 1-2000. Accordingly, these dividends and royalties shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, to wit: ETHIDa "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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue