ITAD Ruling No. 127-03

August 18, 2003 ITAD RULING NO. 127-03 RP-Singapore Tax Treaty Art. 5, 7, 11 BIR Ruling No. DA ITAD 93-01 DBS Bank Philippines, Inc. 6/F, Tower II, The Enterprise Center, 30 Makati City Gentlemen : This refers to your application for relief from double taxation dated September 28, 2000, on behalf of the Development Bank of Singapore Ltd. (DBSL), requesting for tax refund/credit on the overpayment of final withholding tax on interest on foreign interbank loans for the period September 1998 to December 1998, and a ruling that any interest income paid by DBS Bank Philippines, Inc. (DBSP) to DBSL shall be subject to 15% withholding income tax pursuant to the RP-Singapore tax treaty. It is represented that DBSL is a corporation organized and existing under the laws of Singapore with business address at No. 6 Shenton Way, DBS Building, Singapore 068809; that it is not doing business in the Philippines; that DBSL has a branch in Manila known as Development Bank of Singapore, Manila Branch (DBSMB), with office address at 32nd Floor Citibank Tower, 8741 Paseo de Roxas, City of Makati; that DBSMB is registered with the Securities and Exchange Commission under License No. AF095-163, on November 27, 1995; that DBSL extended foreign interbank loans to DBSP, its subsidiary bank in the Philippines; that DBSP withheld and remitted 20% final tax on the gross interest accruing from the said loans for the above-stated period; that the interbank loans are unsecured and do not carry a lender's right to participate in the borrower's profit; that on February 11, 1999, the Board of Directors of the DBSL adopted a resolution approving and authorizing the withdrawal or closure of DBSMB; and that the petition for the withdrawal or closure of DBSMB as of the filing of this application is still in process. In reply, please be informed that the pertinent provisions of the RP-Singapore tax treaty provide as follows, viz : "Article 11 "Interest "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "3. 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, as well as income assimilated to income from money lent by the taxation law of the State which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. "4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on in the other Contracting 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. "Article 7 "BUSINESS PROFITS "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes specifically but is not limited to: "xxx xxx xxx "(b) A branch; "xxx xxx xxx" Based on the above quoted provisions, interest arising in the Philippines and paid to a resident of Singapore may be subject to Philippine tax at the rate not exceeding fifteen percent (15%) of the gross amount of the interest, if the recipient is the beneficial owner thereof. However, if the income recipient, although the beneficial owner of the interest, carries on business in the Philippines through a permanent establishment (such as a branch) and the debt claim in respect of which the payment of interest is effectively connected therewith, the aforementioned preferential tax rate shall not be applicable. In such a case, the interest income of the income recipient which is attributable to such permanent establishment shall be taxed at the rate of twenty percent (20%) as provided for under Section 28 of the National Internal Revenue Code of 1997. (BIR Ruling No. DA-ITAD 93-01) Tax treaty provisions granting preferential tax rates are in the nature of partial tax exemption. Tax laws (including tax treaties) that allow exemption, whether full or partial, are construed strictly against the grantee and liberally in favor of the government. Exemptions from taxation are highly disfavored in law. Thus, tax exemptions claimed by persons cannot be granted if their entitlement thereto remains unproven and unsubstantiated. He who claims tax exemption must be able to justify his claim or right. ( Afisco Insurance Corp., et al. vs. Court of Appeals, et al. , 102 SCAD 613) The same rule is accorded to claims for tax refunds, being in the nature of tax exemptions. ( Commissioner of Internal Revenue vs. S.C. Johnson and Son, et al., G.R. 127105, June 15, 1999) In this case, DBSL failed to justify its claim or right to the preferential tax rate of 15% pursuant to the RP-Singapore tax treaty, for failure to submit documents that will prove that the loan in respect of which the interest is paid is not effectively connected with DBSMB, a permanent establishment of DBSL in the Philippines. A subsequent approval authorizing the withdrawal or closure of DBSMB which would result in the absence of a permanent establishment of DBSL in the Philippines, will not affect the above findings inasmuch as the withdrawal of DBSMB will be done only after the period within which the subject withholding tax on the interest payments have been withheld and remitted to the government. Accordingly, the instant claim for tax refund filed by DBSP on behalf of DBSL alleging overpayment of withholding tax on the interest payments of DBSP to DBSL, for the period September 1998 to December 1998 is hereby denied. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service