ITAD BIR Ruling No. 327-13

December 2, 2013 ITAD BIR RULING NO. 327-13 Article 11, Philippines-Japan tax treaty SMT Philippines, Inc. Special Export Processing Zone Authority 3 Mountain Drive, LIPS II Barangay La Mesa, Calamba City Laguna Attention: Mr. Yoshitaka Taki President Gentlemen : This refers to your tax treaty relief application filed ("TTRA") on June 29, 2011 requesting confirmation that interest paid by SMT Philippines, Inc. ("SMT Philippines") to The Shoko Chukin Bank Ltd. ("Shoko Chukin Bank") are subject to income tax at the rate of 10 percent 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 ("Philippines-Japan tax treaty") . 1 Facts Shoko Chukin Bank is a foreign corporation and a resident of Japan based on its Articles of Incorporation and the Certificate of Residence issued by the Kyobashi Tax Office in Japan on January 5, 2011. Shoko Chukin Bank is located at 10-17, 2-chome Yaesu, Tokyo, Japan. 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 July 22, 2011. On the other hand, SMT Philippines is a domestic corporation located at the Special Export Processing Zone Authority, 3 Mountain Drive, LIPS II, Barangay La Mesa, Calamba City, Laguna, Philippines. On December 10, 2010, SMT Philippines and Shoko Chukin Bank entered into a Loan Agreement where Shoko Chukin Bank granted SMT Philippines a loan amounting to US$500,000.00 to serve as the latter's working capital. The loan bears interest at a floating rate equivalent to Shoko Chukin Bank 's financing rate on the borrowing date of the loan within a margin of 1.25 percent per annum. The Loan Agreement provides that repayment of the principal plus interest shall be done every six months beginning March 25, 2011 to September 25, 2015. In sum, the loan will be repaid as follows: IcHAaS Date of Payment Amount of Principal Amount of Principal Repaid (in US Dollars) Subject of Interest (in US Dollars) March 25, 2011 50,000.00 500,000.00 September 25, 2011 50,000.00 450,000.00 March 25, 2012 50,000.00 400,000.00 September 25, 2012 50,000.00 350,000.00 March 25, 2013 50,000.00 300,000.00 September 25, 2013 50,000.00 250,000.00 March 25, 2014 50,000.00 200,000.00 September 25, 2014 50,000.00 150,000.00 March 25, 2015 50,000.00 100,000.00 September 25, 2015 50,000.00 50,000.00 Total 500,000.00 ========= Based on the Certification issued by Mizuho Corporate Bank Ltd. Manila Branch 2 on July 4, 2011, the amount of US$500,000.00 was remitted to SMT Philippines ' account in that bank on December 13, 2010 through telegraphic transfer. Ruling Relative thereto, 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 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 intended transaction or payment of income, to wit: TAHCEc " 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 accrued before November 4, 2010 , any availment of relief shall be preceded by an application filed at least fifteen days before the intended transaction or payment of income, to wit: " III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: aTcIEH 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 . SDHacT 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 dated 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 Loan Agreement was made on March 25, 2011 , but the relevant TTRA was filed only on June 29, 2011 , this Office hereby DENIES relief on such interest paid by SMT Philippines to Shoko Chukin Bank for having the TTRA filed beyond the prescribed date of filing, pursuant to Section 14 of RMO 72-2010 and 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: ITcCaS "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 Shoko Chukin Bank on June 30, 2011 and thereafter is subject to a reduced rate of income tax under paragraph 2, Article 11 of the Philippines-Japan tax treaty, to wit: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest." Under paragraph 2, interest arising in the Philippines and paid to a resident of Japan is subject to income tax at a rate not to exceed 10 percent. EcDTIH Accordingly, since Shoko Chukin Bank is a resident of Japan, such interest paid to it by SMT Philippines on June 30, 2011 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty. Furthermore, under Section 179 of the Tax Code, the Loan Agreement, being a debt-instrument, is subject to a documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan (the Philippine peso equivalent of US$500,000.00), 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by the Protocol Amending 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 effective January 1, 2009 . 2. Located at 26th Floor, Citibank Tower, Valero corner Villar Streets, Salcedo Village, Makati City, Philippines.