ITAD BIR Ruling No. 359-12

October 18, 2012 ITAD BIR RULING NO. 359-12 Manabat Delgado Amper and Co. 5th Floor, Salamin Building 197 Salcedo Street Legaspi Village Makati City Attention: Atty. Richard R. Lapres Tax Partner Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on November 10, 2008 requesting confirmation that (1) branch profits remitted by SGS Gulf Ltd. Regional Operating Headquarters ("SGS Gulf ROHQ") to its head office abroad are subject to income tax at the rate of 10 percent, and (2) interest paid by SGS Gulf ROHQ to SGS SA ("SGS") is subject to income tax at the rate of 10 percent, pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income . SGS Gulf Ltd. ("SGS Gulf") is a foreign corporation in Switzerland located at 1 Place de Alpes, Geneva, Switzerland. SGS Gulf is licensed by the Securities and Exchange Commission to establish a regional operating headquarters in the Philippines SGS Gulf ROHQ under SEC Registration No. A200300049 issued on July 4, 2003. SGS Gulf ROHQ is engaged in general administration and planning; business planning and coordination; sourcing/procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing; and communication and business development. SGS Gulf ROHQ is located at 20th Floor, Citibank Tower, Paseo de Roxas, Makati City, Philippines. SGS is also foreign corporation in Switzerland located at 1 Place de Alpes, Geneva, Switzerland. It is not registered as a corporation or partnership in the Philippines. TaISDA On May 15, 2008, SGS Gulf (through a resolution approved by its board of directors) authorized SGS Gulf ROHQ to remit branch profits to SGS Gulf amounting P4,554,679.00, which is SGS Gulf ROHQ 's net income as of December 31, 2007. The profits are to be remitted within six months after May 15, 2008. Based on the Certification issued by Citibank NA 1 on June 6, 2012, the amount of $92,603.46 (P4,554,679.00 at P49.1848:$1.00) was remitted by SGS Gulf ROHQ to SGS Gulf on June 16, 2008 at the latter's account at The Royal Bank of Scotland NV Amsterdam Zurich Branch. On July 20, 2007, SGS Gulf ROHQ and SGS entered into a Loan Facility Agreement where SGS granted SGS Gulf ROHQ a revolving credit facility not exceeding P100,000,000.00. The facility is available for advances with a maturity of 1, 3, 6 or 12 months, or such other period as may be agreed upon by the parties. Each advance is subject to interest based on the prevailing interbank rate at the time of drawdown plus a margin of 0.50 percent per annum. Interest is calculated on the actual number of days elapsed over a period of 360 days. The facility is available beginning July 20, 2007 up to July 20, 2009. On July 31, 2007, SGS Gulf ROHQ issued a Promissory Note to SGS in consideration of the former's receipt of a cash advance from SGS amounting P28,416,311.00 and made pursuant to the Loan Facility Agreement. The cash advance bears interest at the rate of 7.1 percent per annum. Under the Note, SGS Gulf ROHQ unconditionally and irrevocably promises to pay the amount and accruing interest thereon after a period of twenty-four days or on August 24, 2007 . 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: cADaIH " 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. 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) aTEADI This decision is upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the 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 branch profits were remitted by SGS Gulf ROHQ to SGS Gulf on June 16, 2008 , and the interest on the cash advance was paid by SGS Gulf ROHQ to SGS on August 24, 2007 , but the relevant TTRA was filed only on November 10, 2008 , this Office hereby DENIES relief on these payments for having the TTRA filed beyond the required period of at least fifteen days before the intended payment of income under Section III (2) of RMO 1-2000. Accordingly, the branch profits shall be subject to income tax at the rate of 15 percent and the interest at the rate of 20 percent under Sections 28 (A) (5) and (B) (5) (a) of the National Internal Revenue Code of 1997, as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporations . xxx xxx xxx (5) Tax on Branch Profits Remittances . Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." cSIHCA 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." Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at 8741 Paseo de Roxas, Makati City, Philippines.