ITAD BIR Ruling No. 363-12

October 23, 2012 ITAD BIR RULING NO. 363-12 Article 11, Philippines-Japan Tax Treaty, as amended; BIR Ruling No. ITAD-032-10; BIR Ruling No. ITAD-020-10 Chaves Hechanova & Lim Law Office Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor Gamboa Sts. Makati City Attention: Atty. Alfredo C. Lim Atty. Maria Regina A. Ruiz Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed August 20, 2010 , on behalf of Molex Japan Co. Ltd. (Molex) and S'Next Philippines, Inc. (S'Next) , requesting confirmation that the interest on loan to be paid by S'Next to Molex is qualified for tax treaty benefits 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 Molex , with principal office at 5-4, Fukami-Higashi 1-chome, Yamato, Kanagawa, Japan, is a resident of Japan, and is organized and existing under the laws of Japan as evidenced by a duly authenticated certified copy of a Complete Record of Current Particulars issued by Yokohama District Legal Affairs Bureau Shonan Bureau dated April 16, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated August 16, 2010; that, on the other hand, S'Next is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with business address at 7170 Blue Diamond cor. Feati Street, Clark Freeport Zone, Angeles, Pampanga 2023, Philippines; and that Molex is not a shareholder of S'Next per certification issued by the Corporate Secretary of S'Next dated January 26, 2011. It is further represented that on April 29, 2010 , a Loan Agreement ("Agreement") was executed by and between S'Next and Molex whereby the latter agrees to extend to the former a principal sum of US Dollar: Four Hundred Thousand (US$400,000.00) on staggered basis in accordance with the following schedule: EaSCAH Date of Release Amount April 29, 2010 US$80,000.00 May 15, 2010 70,000.00 June 15, 2010 60,000.00 July 15, 2010 50,000.00 August 15, 2010 50,000.00 September 15, 2010 50,000.00 October 15, 2010 40,000.00 Total Loan Amount 400,000.00 ========= that for which S'Next agrees to pay Molex a fixed interest at the rate of 1.5% per annum ; and that the proceeds of the loan is for the purpose of S'Next's business, to be paid on or before April 28, 2012 on a semi-annual basis, i.e., June 15 and December 15 of each year. It is further represented, based on the Certificate of Inward Remittance issued by the Rizal Commercial Banking Corporation ("RCBC") on May 24, 2010 and August 3, 2010, that its branch in Clark, Angeles, Pampanga received inward remittances from the Bank of Tokyo, Japan by order of Molex, in the amounts of US$79,945.00, US$69,951.25, US$59,957.50 and US$139,907.50 which net proceeds were credited to the dollar account of S'Next . It is finally represented, that as of January 26, 2011, Molex is not a shareholder of S'Next ; and that based on the Sworn Statement by the same Corporate Secretary on September 28, 2010 and that the transaction subject of the 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 of the taxpayer/s involved. In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) [5] (a) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . xxx xxx xxx (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;" However, said interest income may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the NIRC of 1997, as amended, provides, viz. : CAcEaS "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Accordingly, Article 11 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply the instant case. It provides: "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, the amount of tax imposed by the Philippines on the interest 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 interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, 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 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. DHaEAS For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development 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. 5. 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. 6. The provisions of paragraphs 1, 2 and 3 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, interests on foreign loans which are generally taxable at 20 percent may qualify for a preferential rate of 10 percent of the gross thereof if the recipient of the interest is also the beneficial owner thereof. However, said 10 percent shall not apply if the Japanese corporation has a permanent establishment in the Philippines to which the subject interest income is effectively connected to. HCTaAS 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 . . . " (Underscoring 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 . IaECcH 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 ." (Underscoring ours) 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 thereof, this Office hereby DENIES relief to those interests paid by S'Next to Molex before September 4, 2010 , 1 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said interests shall be subject to income tax at the rate provided for under Section 28 (B) (5) (a) of the NIRC of 1997 as quoted above. However, all interests paid by S'Next to Molex on September 4, 2010 and thereafter are hereby GRANTED relief and shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. Moreover, the herein Loan Agreement entered into between Molex and S'Next is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. 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. SDTaHc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The fifteenth day from TTRA filing date of August 20 is September 4, 2010.