ITAD BIR Ruling No. 330-12

September 3, 2012 ITAD BIR RULING NO. 330-12 Articles 11 and 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-183-11; BIR Ruling No. ITAD-115-11 Philinak Industries, Inc. Lima Technology Center Malvar Batangas, 4233 Attention: Shigefumi Mizutani General Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 11, 2009 , requesting to avail the 10 percent final withholding tax on royalty and interest payments by Philinak Industries, Inc. ("Philinak") to Gomunoinaki Co., Ltd. ("Gomunoinaki"), pursuant to the amended 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, as amended") . It is represented that Gomunoinaki is a corporation organized and existing under the laws of Japan and is a resident of Japan with principal address at 2-8-1 Kamimaezu, Naka-ku Nagoya-shi, Aichi-ken, Nagoya Japan 4608333 per Residence Certificate issued by the District Director of the Nagoyanaka Tax Office dated October 9, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 19, 2009; that Philinak is a corporation organized and existing under the laws of the Philippines with principal address at Lima Technology Center Malvar, Batangas, 4233. It is further represented that Philinak and Gomunoinaki entered into a Loan Agreement on February 20, 2006, and another Amended and Restated Loan Agreement on March 1, 2009, whereby both parties agreed that the loan amended and restated on March 1, 2008 for the total sum of US Dollars 2,040,000.00, 1 which matured on March 1, 2009, be repaid on March 1, 2010, and the interest rate of the same loan be amended. Moreover, it is represented that on April 1, 2006, Philinak and Gomunoinaki entered into a Royalty Agreement, whereby Gomunoinaki shall provide Philinak royalty which includes the following articles: 1) The use or right to any technique and know-how relating to design, compounding, and molding of rubber and plastic parts of Gomunoinaki . aSTECA 2) The use or right to technique and know-how relating to quality control, process control, production engineering and maintenance. 3) To provide Philinak necessary information in developing the business in or out of the Philippines, business, political, social and economic conditions together with updated laws and regulations thereof. 4) To assist Philinak in sales promotion of its products to the possible customers and in the development of market in target region. 5) To do such other assistance as may be required by Philinak acceptable to Gumunoinaki in order to smoothly carry out manufacturing operations by Philinak and to expand its business in Philippines. 6) Both Philinak and Gumunoinaki agree that the means and procedures of the assistance are provided through such convenient methods for both parties as correspondence, related documents including drawings, dispatch of specialists, training etc. without limitations. That the royalty fee shall be one percent (1%) of annual net sales less Philippine withholding tax for the current fiscal year; that the royalty fee shall become effective on April 1, 2006 and shall be settled quarterly at quarter ends by bank remittance to a bank account designated by Gumunoinaki ; that the term of the said Royalty Agreement shall be automatically extended for a successive period of one (1) year unless either Philinak or Gumunoinaki gives the other party written notice of its intention to the contrary ; and the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per Affidavit executed by the Assistant General Manager of Philinak dated November 24, 2009. CDaSAE 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: " 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) cIHDaE 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. 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, this Office hereby DENIES relief on the interest and royalty payments of Philinak to Gumonoinaki under the subject Loan Agreement and Royalty Agreement made before August 26, 2009 , since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said interest and royalty payments shall be subject to income tax at the rate provided under Sections 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . . . . (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%)." DIETcC However, relief is hereby GRANTED on interest and royalty payments made on August 26, 2009 and thereafter . Thus, Articles 11 and 12 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. They provide: On Interest "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. 3. Notwithstanding the provisions of paragraph (2), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: ECTAHc (a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; (b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 4. The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures." Based on the above-quoted provisions, the interest payments of Philinak to Gumunoinaki under their Loan Agreement after 15 days from the filing of the TTRA on August 11, 2009 shall be subject to the preferential tax rate of 10 percent of the gross amount of the interests. (BIR Ruling No. ITAD-115-11 dated April 11, 2011) Moreover, the subject Loan Agreement is subject to documentary stamp tax imposed under Republic Act No. 9243. On Royalty The amended Article 12 of the same treaty which took effect beginning January, 2009 provides, as follows: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. LexLib 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Based on the afore-cited provisions, the royalty payments shall be taxed at the preferential tax rate of 25 percent if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; 10 percent if the payor is a Board of Investments (BOI)-registered enterprise; and in all other cases, 15 percent of the gross amount of the royalties. Under the Protocol amending the Philippines, Japan tax treaty, the 25 percent, 15 percent and 10 percent rates were respectively reduced to 15 percent, 10 percent and 10 percent. cETDIA Such being the case, since Philinak is not a BOI-registered enterprise, and its payments to Gumunoinaki are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the royalty payments after 15 days from the filing of the TTRA on August 11, 2009 are subject to the preferential tax rate of 10 percent pursuant to Article 12 (2) (b) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 183-11 dated June 27, 2011) Furthermore, the royalty fee paid by Philinak to Gumunoinaki is subject to the 10 percent 2 value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, Philinak , being the payor in control of the payment shall be responsible for the withholding of VAT on such fee on behalf of Gumunoinaki by filing a separate VAT return for and on behalf of Gumunoinaki using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from Philinak , if it is a VAT-registered taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, Philinak is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Gumunoinaki upon its request, and the fourth copy to be retained by the Philinak as its file copy. [Section 4.110-3 (b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2 (b), RR No. 16-05); Section 4.114 (D), RR No. 2-98, as last amended by RR No. 28-03] This ruling is issued on the basis of the foregoing 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. Per the Certification of proof of inward remittance issued by Metrobank dated September 30, 2009. 2. Effective February 1, 2006 rate is 12%.