ITAD BIR Ruling No. 370-12

October 31, 2012 ITAD BIR RULING NO. 370-12 Article 11, Philippines-Japan tax treaty BOT Lease and Finance Philippines, Inc. 3rd Floor, Prince Building 117 Rada Street, Legaspi Village Makati City Attention: Ms. Margareth C. Zablan General Manager Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 14, 2009 requesting confirmation that interest paid by BOT Lease and Finance Philippines, Inc. ("BOT Lease Philippines") to BOT Lease Company Ltd. ("BOT Lease") is subject to income tax at the reduced 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 BOT Lease is a foreign corporation and a resident of Japan based on the Certification of Residence issued by the Nihonbashi Tax Office in Japan on August 5, 2009. BOT Lease is located at 9-13, Nihombashi-Honcho 1-chome, Chuo-ku, Tokyo, Japan. BOT Lease is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on July 31, 2009. On the other hand, BOT Lease Philippines is a domestic corporation located at 3rd Floor, Prince Building, 117 Rada Street, Legaspi Village, Makati City, Philippines. On January 31, 2008, BOT Lease Philippines and BOT Lease entered into a Loan Agreement where BOT Lease granted BOT Lease Philippines a loan amounting 37,637,000.00 for the acquisition of certain equipment by BOT Lease Philippines to be leased to Senju Solder (Philippines), Inc. The equipment consist of soldering machine, flux mixing machine mixing unit and flux filling equipment, dicing machine, dissolving pot and burner, among others. The loan bears interests at the rate of 1.35 percent per annum. The principal and interest of the loan will be repaid as follows: ETDHaC Date of Payment Amount of Amount of Total (in Yen) Principal Repaid Interest Paid (in Yen) (in Yen) April 30, 2008 2,924,691.00 127,025.00 3,051,716.00 July 31, 2008 2,934,562.00 117,154.00 3,051,716.00 October 31, 2008 2,944,466.00 107,250.00 3,051,716.00 January 31, 2009 2,954,404.00 97,312.00 3,051,716.00 April 30, 2009 2,964,375.00 87,341.00 3,051,716.00 July 31, 2009 2,974,380.00 77,336.00 3,051,716.00 October 31, 2009 2,984,418.00 67,298.00 3,051,716.00 January 31, 2010 2,994,490.00 57,226.00 3,051,716.00 April 30, 2010 3,004,597.00 47,119.00 3,051,716.00 July 31, 2010 3,014,737.00 36,979.00 3,051,716.00 October 31, 2010 3,024,912.00 26,804.00 3,051,716.00 January 31, 2011 4,916,968.00 16,598.00 4,933,566.00 37,637,000.00 865,442.00 38,502,442.00 =========== ======== ========== Based on the Statement of Inward Remittance issued by the Bank of Tokyo-Mitsubishi UFJ Ltd. on January 31, 2008, the amount of 37,637,000.00 was remitted by BOT Lease to BOT Lease Philippines on that date. 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 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. IDETCA 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 upheld by the Supreme Court in Resolution G.R. No. 168531 on 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 BOT Lease Philippines has been paying interest to BOT Lease since April 30, 2008 and every three months thereafter, but the relevant TTRA was filed only on September 14, 2009 , this Office hereby DENIES relief on interests paid to BOT Lease before September 29, 2009 , 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. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. IAETDc (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 BOT Lease on September 29, 2009 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. Accordingly, since BOT Lease is a resident of Japan, such interest paid to it by BOT Lease Philippines on September 29, 2009 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 37,637,000.00), 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 . . ." 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. ISCDEA 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. September 29, 2009 is the fifteenth day after the filing of the TTRA on September 14, 2009.