ITAD Ruling No. 095-05

September 2, 2005 ITAD RULING NO. 095-05 Article 11, Philippines-Netherlands tax treaty BIR Ruling No. ITAD-193-02; BIR Ruling No. DA-438-96 Sycip Salazar Hernandez & Gatmaitan SSHG Law Centre, 105 Paseo de Roxas Makati City 1226 Attention: Emmanuel C. Paras Dodjie D. Lagazo Gentlemen : This refers to your letter dated April 21, 2005, requesting confirmation of your opinion on the following, relative to the purchase of, and investment in, government issued Treasury Bills ( T-Bills ) by ING Bank N.V. Amsterdam ( ING Amsterdam ), pursuant to the Philippines-Netherlands tax treaty: 1. That the investment made by ING Amsterdam in T-Bills issued by the Philippine Bureau of Treasury is exempt from Philippine tax on interest payments thereon pursuant to Section (3)(a), Article 11 of the Philippines-Netherlands tax treaty; 2. That for purposes of said investments, ING Amsterdam will be considered a taxable entity separate and distinct from its full branch in the Philippines, ING Manila; and 3. Any subsequent purchase of, and investment in, government issued T-Bills or other government securities to be made by ING Amsterdam in the future, where it will again exchange US Dollars for Philippine pesos through ING Manila, and purchase T-Bills or other government securities from ING Manila as an authorized bank and dealer in government securities, will also be exempt from Philippine tax pursuant to Article 11, Section 3(a) of the Philippines-Netherlands tax treaty. It is represented that ING Amsterdam is a non-resident foreign corporation organized and existing under the laws of Amsterdam, The Netherlands with principal place of business at Amstelveenseweg 500, Amsterdam (postcode 1081 KL) and is a resident of The Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per Certification issued by the inspector of the Tax Administration Amsterdam, the Netherlands, on August 18, 2004; that it is engaged in providing banking and other allied services to its clientele; that on September 12, 1996, it was licensed by the Securities and Exchange Commission to operate a branch office in the Philippines, ING Bank N.V. Manila Branch (ING Manila); that on December 8, 2004, ING Amsterdam invested in T-Bills issued by the Philippine Bureau of Treasury; that in making such investment, ING Amsterdam remitted and sold US dollars for Philippine pesos to ING Manila; that ING Amsterdam purchased the T-Bills from ING Manila, which is an authorized agent bank and dealer of locally fixed income instruments, either through the primary market or the secondary market; that the investment was duly registered with the Bangko Sentral ng Pilipinas (BSP); that ING Manila assisted ING Amsterdam in making such registration; and that the funds which were used to purchase the T-Bills came wholly and directly from ING Amsterdam. cDECIA In reply, please be informed that the situation where a parent company enters into a business transaction without the participation of its branch is recognized by the Supreme Court to be a separate and distinct activity of the parent company from the branch for tax purposes. This was enunciated in the case of Marubeni vs. CIR ,(G.R. No. 76573 dated September 14, 1989),where the Supreme Court held that: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not, the foreign corporation." In the instant case, funds used to purchase the T-Bills came wholly and directly from ING Amsterdam, clearly showing that ING Amsterdam made the investment in the T-bills independently of its branch. The participation of the branch (ING Manila) in the transaction was limited to merely acting as the authorized agent bank and dealer of the T-bills purchased by ING Amsterdam, and not as an agent of ING Amsterdam in the transaction. Therefore, applying the above pronouncement of the Supreme Court, any income derived by ING Amsterdam from its investment in the T-Bills issued by the Philippine Bureau of Treasury, which was made independently of its branch, ING Manila, shall be considered as income of ING Amsterdam. In relation thereto, income of ING Amsterdam from its investment in the T-bills are covered by Article 11 of the Philippines-Netherlands tax treaty. It provides "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that 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 if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State ;(emphasis supplied) b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. HaTISE xxx xxx xxx 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income as imitated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 6. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient of the interest, being a resident of one of the States, carries on in the other State in which the interest arises, a trade or business through a permanent establishment situated therein, or performs in that other State professional 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 a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, interest income arising from the Philippines shall be exempt from Philippine income tax if the payor of the interest is the government of the Philippines or a local authority thereof. Considering that the payor of interest derived from Philippine Government T-Bills is the Philippine government, interest income that may be derived by residents of The Netherlands from said Philippine T-Bills shall not be subject to Philippine income tax but are subject to tax only in the Netherlands. (BIR Ruling No. DA-438-96 dated November 22, 1996) Accordingly, investment made by ING Amsterdam in Treasury Bills issued by the Philippine Bureau of Treasury is exempt from Philippine tax on interest payments thereon pursuant to Section (3)(a), Article 11 of the Philippines-Netherlands tax treaty. This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service