ITAD Ruling No. 116-04

October 27, 2004 ITAD RULING NO. 116-04 Protocol, Philippines-Japan tax treaty Section 28, NIRC of 1997 BIR Ruling No. 013-95 Itochu Corporation (Manila Branch) 16th Floor, 6788 Ayala Avenue Oledan Square, Makati City 1226 Attention: Takaharu Tamuro Admin . & Finance Manager Gerardo T. Buan Legal Counsel Gentlemen : This refers to your application for relief from double taxation dated September 15, 2004, requesting confirmation of your opinion that the branch profits to be remitted by the branch office (hereinafter referred to as "ITOCHU-Phil.") of Itochu Corporation shall be subject to the preferential tax rate of 10% under the Protocol of the Philippines-Japan tax treaty. It is represented that Itochu-Phil. is the Philippine branch office of Itochu Corporation, a corporation duly organized and existing under the laws of Japan with principal office located at 5-1 Kita Aoyama, 2-chome, Minato-ku, Tokyo, Japan; that Itochu Corporation is incorporated and organized in Japan as evidenced by its Articles of Incorporation duly authenticated by the Philippine Embassy in Tokyo, Japan on July 26, 2004; that Itochu-Phil is duly registered as a branch office with the Securities and Exchange Commission under Amended SEC License No. F-507 dated May 20, 1997; and that Itochu Corporation has instructed Itochu-Phil. to remit to Japan branch profits in the maximum amount of Five Million US Dollars (US$5,000,000.00) by October 2004. In reply, please be informed that Section 28 of the National Internal Revenue Code of 1997 provides as follows, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . "(A) Tax on Resident Foreign Corporations . "(1) In General . Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). aDHCcE "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 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. "xxx xxx xxx." However, the Protocol of the Philippines-Japan tax treaty provides as follows, to wit: "PROTOCOL xxx xxx xxx "5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 per cent of the amount of the part of such earnings which is remitted abroad . For the purposes of this paragraph, the term 'earnings' means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines. (Emphasis supplied) "xxx xxx xxx" Under Article 5 of the said treaty, the term "permanent establishment" includes a branch, to wit: "Article 5 "(1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term 'permanent establishment' includes especially: (a) a store or other sales outlet; (b) a branch ; (c) an office; (d) a factory; (e) a workshop; (9 a warehouse; (g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. (Emphasis supplied) xxx xxx xxx In view of the above provisions, Itochu-Phil., being a branch of Itochu Corporation, qualifies to avail of the 10% preferential tax rate. The branch profit remittance tax, which is an additional tax imposed upon Itochu-Phil., should not exceed 10% of such net income or earnings remitted to its head office. Such being the case, the 15% tax rate prescribed under Section 28(A)(5) of the Tax Code of 1997 shall not apply to Itochu-Phil. Instead, the preferential tax rate of 10% under the Philippines-Japan tax treaty shall be imposed. ( Bank of Tokyo-Mitsubishi, Ltd . -Manila Branch vs . Commissioner of Internal Revenue , CTA Case No. 5697, July 26, 2000; BIR Ruling No. 013-95 ) This ruling is issued on the basis of the facts as represented. 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. HTCSDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service