ITAD BIR Ruling No. 394-12

December 12, 2012 ITAD BIR RULING NO. 394-12 Article 10(7), Philippines-Netherlands tax treaty Magma Netherlands B.V. Philippine Branch 24th Floor, 6750 Building, Ayala Avenue Makati City Attention: Ms. Trinity S. Gatuz Resident Agent Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 10, 2012, requesting for a ruling that the profits to be remitted to Magma Netherlands B.V. ("Magma-Netherlands") by its Philippine branch office are subject to final withholding tax at the preferential rate of 10 percent, pursuant to Article 10 (7) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that Magma-Netherlands is a corporation duly organized and existing under the laws of the Netherlands with principal address at Strawinskylaan 3105, 7E 1077 ZX, Amsterdam, the Netherlands, and is a resident thereof within the meaning of the Philippines-Netherlands tax treaty; that Magma-Netherlands has a branch office in the Philippines registered with the Philippine Securities and Exchange Commission under Amended S.E.C. Registration No. AF094-000005 issued on October 25, 1994 ("Magma-Philippines") , with office address at 24th Floor 6750 building, Ayala Avenue, Makati City; that per the Sworn Certification issued by the resident agent of Magma-Philippines issued on May 7, 2012, Magma-Philippines has earmarked the amount of Five Hundred Thousand Dollars, US currency (USD500,000.00) from its accumulated earnings as of December 31, 2011, for remittance to Magma-Netherlands ; and that based on the proof of bank remittance issued by Citibank, such profits were remitted to Magma-Netherlands on May 17, 2012. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per the Sworn Certification issued on May 7, 2012 by the resident agent of Magma-Philippines . In reply, please be informed that Section 28 of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides, viz. : "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 percent (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. TEaADS xxx xxx xxx However, Article 10 (7) of the Philippines-Netherlands tax treaty provides, to wit : "Article 10 DIVIDENDS xxx xxx xxx 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8." Under Article 5 (2) of the same treaty, the term "permanent establishment" includes a branch, to wit : "Article 5 PERMANENT ESTABLISHMENT xxx xxx xxx 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; DEcTCa e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. . . ." In view of the above provisions, Magma-Philippines , being a branch of Magma-Netherlands , qualifies to avail of the 10 percent preferential tax rate in relation to its remittance of branch profits. The branch profits remittance tax is an additional tax imposed upon Magma-Philippines . The 10 percent tax shall be imposed on the total profits applied or earmarked for remittance without any deduction for the tax component thereof. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be disclosed that the actual facts are different, 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