ITAD BIR Ruling No. 358-13

December 20, 2013 ITAD BIR RULING NO. 358-13 Article 11, Philippines-Japan tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Street Makati City Attention: Atty. Malou P. Lim Partner, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on February 28, 2008 requesting confirmation that interest paid by Yokohama Tire Philippines, Inc. ("Yokohama Tire Philippines") to Yokohama Bank Ltd. ("Yokohama Bank") and Shizuoka Bank Ltd. ("Shizuoka Bank") are exempt from 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 ("Philippines-Japan tax treaty"). Facts Yokohama Bank and Shizuoka Bank are foreign corporations and residents of Japan based on their respective Residence Certificates issued by the Yokohamanaka and Shizuoka Tax Offices in Japan on January 23 and 26, 2007. Yokohama Bank is located at 3-1-1 Minatomirai, Nishi-ku, Yokohama, Nakagawa, Japan, and Shizuoka Bank at 10 Gofukucho 1-chome, Aoi-ku, Shizuoka, Japan. Both are not registered as corporations or partnerships in the Philippines based on the Certifications of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on January 10, 2008. On the other hand, Yokohama Tire Philippines is a domestic corporation located at IE-5, Clark Freeport Zone, Pampanga, Philippines. On November 7, 2006 , Yokohama Tire Philippines, Yokohama Bank and Shizuoka Bank , among others, entered into a Syndicated Term Loan Agreement where each bank granted loan to Yokohama Tire Philippines amounting $10,000,000.00 for a total of $20,000,000.00. The loan will be used to finance the construction of Yokohama Tire Philippines ' production facility in the Philippines for tire and other rubber products. The loan will be paid by making 20 equal payments of $1,000,000.00 every quarter, particularly, on the fourteenth day of February, May, August and November of each year, beginning February 14, 2009 up to November 14, 2013. The loan bears a floating rate of interest based on the London Interbank Offer Rate ("LIBOR") for the US dollars for a period of three months plus a margin of 0.15 percent per annum, beginning February 14, 2007 up to November 14, 2013. Interest payment shall be on the fourteenth day of February, May, August and November of each year, beginning February 14, 2007 to November 14, 2013. HAaDTI As one of the conditions for the granting of the loan, Yokohama Bank and Shizuoka Bank , the lenders, required that a letter of guarantee be issued by the Japan Bank for International Cooperation ("JBIC") for this purpose. JBIC is a foreign bank in Japan located at 4-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo, Japan. Consequently, on November 7, 2006 , the parties entered into a Guarantee Agreement where JBIC guaranteed the payment of the principal and the interest of the loan granted to Yokohama Tire Philippines , including any delinquency charges in connection therewith, in the event the latter defaults in its contractual obligations to Yokohama Bank and Shizuoka Bank . Based on the Certificate of Deposit issued by Mizuho Corporate Bank Ltd. Manila Branch 1 on October 19, 2007, an amount of $20,000,000.00 was credited to the account of Yokohama Tire Philippines on November 14, 2006 representing the proceeds of the loan granted to it by Yokohama Bank and Shizuoka Bank . Ruling 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 fifteen 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 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. cIEHAC 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 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, since the Syndicated Term Loan Agreement that gives rise to the interest has been in effect on November 7, 2006 , but the TTRA for this purpose was filed only on February 28, 2008 , this Office hereby DENIES relief on interest paid by Yokohama Tire Philippines to Yokohama Bank and Shizuoka Bank before March 14, 2008 , 2 pursuant to 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: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . SDAcaT (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 the two banks on March 14, 2008 up to December 31, 2008 is subject to relief 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: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. Moreover, upon the effectivity of 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 on January 1, 2009 , interest paid to Yokohama Bank and Shizuoka Bank on January 1, 2009 and thereafter is subject to relief under the renumbered and amended paragraph 3, Article 11 of the treaty, to wit: "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. cCTaSH For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: 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." Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of Japan is subject to income tax in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in respect of government securities, bonds or debentures, and (b) 15 percent in all other cases. Under paragraph 3, such interest is exempt if the debt-claim that gives rise to the interest is guaranteed, insured or indirectly financed by the Japanese government, a political subdivision or local authority of Japan, the central bank of Japan, or a financial institution wholly owned by the Japanese government, particularly, the Japan Bank for International Cooperation or JBIC, or the Nippon Export and Investment Insurance. Accordingly, since the Protocol to the Philippines-Japan tax treaty took effect on January 1, 2009 , which, among others, recognized JBIC as a financial institution wholly owned by the Japanese government, only interest paid on that date and thereafter by Yokohama Tire Philippines to Yokohama Bank and Shizuoka Bank under the Syndicated Term Loan Agreement and guaranteed by JBIC shall be exempt from income tax under paragraph 3, Article 11 of the amended treaty. Prior to this, such interest paid by Yokohama Tire Philippines to Yokohama Bank and Shizuoka Bank on March 14, 2008 to December 31, 2008 shall be subject to income tax at the rate of 15 percent under paragraph 2 (b), Article 11 of the original treaty. Finally, under Section 179 of the Tax Code, as amended, the Loan Agreement in question, being a debt-instrument, is subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan, 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." DISTcH 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. Situated at 26th Floor, Citibank Tower, Valero corner Villar Streets, Salcedo Village, Makati City, Philippines. 2. March 14, 2008 is the fifteenth day of filing the TTRA on February 28, 2008. 2008 is a leap year.