December 3, 2010 ITAD BIR RULING NO. 070-10 Article 11 of the Philippines-Israel tax treaty; Section 176, NIRC of 1997 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen This refers to your application for relief from double taxation dated February 7, 2006, on behalf of your client TI (Phils.), Inc. (TIPI), requesting confirmation that: (1) the interest payments to be made by TIPI to Texas Instruments Israel, Limited (TIIL) shall be subject to the preferential tax rate of 10%, pursuant to Article 11 of the Philippines Israel tax treaty; (2) TIP, being a PEZA-registered enterprise subject to the 5% preferential tax rate, is not subject to the documentary stamp tax (DST) on loan agreements imposed under Section 179 of the National internal Revenue Code of 1997, as amended by Republic Act No. 9243; and (3) TIIL, as the other party to the loan agreement, is a nonresident foreign corporation and is therefore not subject to DST on the loan agreement since it is beyond the taxing jurisdiction of the Philippines. It is represented that TIL is a corporation organized and existing under the laws of Israel with principal address at 8 Hasadnaiot Street, PO. Box 12670, Herzliya 46766, Israel; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated January 24, 2006; that TIPI is a corporation organized and existing under the laws of the Philippines with principal address at PEZA Loakan Road, Baguio City, Philippines; that its primary business purpose is to reduce and sell semi-conductor products and other electronics products and components for export; that in a resolution issued on December 29, 2000, PEZA approved the transfer of the PEZA Registration (Certificate No. 79-02 dated March 5, 1979) of Texas Instruments (Philippines), Inc, Philippine branch, referred to as old TIPI, inclusive of all subsequent PEZA-approved and registered projects, and all rights and obligations arising therefrom, to TIPI; that as a result of the transfer, TIP! became entitled to all the incentives previously granted by PEZA to old TIPI, which incentives include the imposition of a preferential tax rate of 5% on gross income earned by old TIP! within its economic zone. It is further represented that TIPI entered into a loan agreement secured with a promissory note with TIIL which shall extend from September 28, 2005 to September 28, 2008 for the amount of One Hundred Fifty Six Million US Dollars ($156,000,000.00); that the amount loaned shall bear interest at the rate of 3-month USD Libor + 1.25% per annum. In reply, please be informed as follows:On the availment of the preferential tax rate of 10% under the Philippines-Israel tax treaty Article 11 of the Philippines-israel tax treaty provides as follows: “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 also be taxed in the Contracting 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 10 percent of the gross amount of the interest. KK OK XXX" 5. 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 prices attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. XXX XXX XXX" Considering that TIL is a resident of Israel within the meaning of the Philippines-Israel tax treaty and is the beneficial owner of the interest arising in the Philippines, the interest payments made by TIPI to TIIL are subject to Philippine income tax at the rate of ten percent (10%) of the gross amount thereof. M, On the imposition of DST It is your position that TIPI, being a PEZA-registered enterprise, is liable only to the preferential tax treatment of 5% on its gross income, which shall be in lieu of local and national taxes pursuant to the PEZA Law. Hence, TIPI is exempt from the payment of the DST on loan agreement. Furthermore, it is your position that TIIL, as the other party to the loan agreement, being a non-resident foreign corporation, is not subject to DST since it is beyond the taxing jurisdiction of the Philippines. We regret that, contrary to your position, this Office is of the opinion as it hereby holds that the said Loan Agreement between TIP! and TIIL is subject to DST for the reasons stated below. A. Territoriality or the Situs of Taxation Territoriality or the situs of taxation, which means the ‘place of taxation,’ is a limitation on the taxing power. This is so because well-recognized is the principle that however broad the power of taxation may be as to its character and no matter how searching it is in extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction; that is to say, to subjects within its jurisdiction, or over which it can exercise dominion (57 Am. Jur. 457). Otherwise stated, taxation maybe exercised only within the territorial jurisdiction of the taxing authority (see 57 Am. Jar. 88). It must be emphasized, however, that if no constitutional provisions are violated, the power of the legislature to fix situs is undoubted (2 Cooley 90). With the legislature primarily lies the discretion to determine, inter alia, the situs (place) of taxation (Commissioner of internal Revenue, et al, vs. Santos, et al, 277 SCRA 617). Within the territorial jurisdiction, the taxing authority may determine the "place of taxation" (tax situs) (Tax /aw and Jurisprudence by Vitug and Acosta, 2nd Ed, p. 10). In Tax law and Jurisprudence (2nd Ed, pp. 10-11), Justice Vitug and Justice Acosta stated that: ‘mn fixing the tax situs, the following eniteria are generally observed, viz.: "KK XK XX ‘( For excise taxes, thetax situs can be the place (1) where the privilege is exercised; (2) where the taxpayer is a national of, or (3) where he has his residence. In the selection of the appropriate criteria, the taxing authority is given wide latitude; among the circumstances often considered are the nature of the tax, the extent of benefit that may be derived by the taxpayer and equity principles. But unless otherwise stated, thetax situs is deemed to be the place where the privilege is exercised. Under the National Internal Revenue Code, all three criteria (nationality, residence, and place of the exercise of privilege) are used in the levy of income tax, as well as estate and gifts taxes, but not of business taxes."(underscoring supplied; citations omitted) Thus, in imposing DST, an excise tax, the foregoing criterion in fixing the situs thereof is a mere "guideline" and in no way prevents the taxing authority from providing otherwise. B. The situs of the Documentary Stamp Tax It should be helpful to first give a brief historical background on the development of Section 173 of the Tax Code of 1997, In Section 173, both of the Tax Code of 1986, as amended by Presidential Decree No. 1994, and of the Tax Code of 1993 it is provided that: "SEC. 173. Stamp taxes upon documents, instruments, loan agreements, and papers. — Upon documents, instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property incidents thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax.” The foregoing provision was, however, amended or modified by Republic Act No. (RA) 7660 1 which later was reenacted in RA 8424 (the law embodying the Tax Code of 1997),2 to read as follows:"SEC. 173. Stamp taxes upon documents, instruments, loan agreements, and papers. — Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the transactions so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." (underscoring supplied) It must be noted that there is a change in phraseology of the subject provision of law. It is a settled rule in statutory construction that a change in phraseology by amendment of a provision of law indicates a legislative intent to change the meaning of the provision from that it had originally. Thus, where the legislative history shows that a statute has undergone several amendments, each amendment using different phraseology, the deliberate selection of language differing from that of the earlier act on the subject indicates that a change in meaning of the law was intended, and courts (as well as administrative officers who are charged with interpreting the provisions of special laws such as the Tax Code) should so construe that statute as to reflect such change in meaning. (Agpalo, Statutory Construction, 3rd Ed, p. 79) Thus, it may be inferred from the premises that the legislators have intended to fix the situs of the DST to be within the Philippines, when it inserted the phrase ‘wherever the document is made, signed, issued, accepted, or transferred"in Section 173 of the Tax Code as long as ‘the obligation or right arises from Philippine sources or the property is situated in the Philippines’: C. The validity of BIR Nos. 007-00, DA-107-01, DA-111-01, DA-156-02, and DA-097-03 The said BIR Rulings, especially B/R Ruling No. 007-00, is contradicted by the foregoing discussions with respect to the matter on the imposition of the DST. At this juncture, the resolution of the question of the prospective or retroactive application of this ruling is in order. It must be emphasized, however, that B/R Ruling No. 007-00 is considered valid and effective beginning January 5, 2000 — the date of its issuance and remained valid only until March 21, 2001, when B/R Ruling No. /TAD-036-07 was issued. [This is clarified in the succeeding discussions] BIR Ruling No. 007-00dated January 5, 2000, signed by then Commissioner Beethoven L. Rualo, is the ruling of first impression or the precedent ruling constantly invoked on the tax exemption of non-residents on the imposition of DST. It has been cited as basis for B/R Ruling Nos. DA-107-01, DA-111-01, DA-156-02, and DA-097-03. Specifically, the said ruling stated, among others, viz.: since STC-Taiwan is a non-resident foreign corporation, it is not subject to the documentary stamp tax imposed under said Section (referring to Section 175, tax Code of 1997), since under its inherent limitations taxation may be exercised only within the territorial jurisdiction of the taxing authority. (see 51 Am. Jur. 88)" It may be inferred from the foregoing pronouncement that a "non-residentforeign corporation’ may NEVER BE subjected to DST, nor to any other tax at all for that matter, being beyond the reach of the territorial jurisdiction of the Philippine tax authority. As for DST, the pronouncement clearly negates and fails to consider the clause — ‘wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines . .."— found in Section 173 (as earlier discussed), and other provisions on norresident foreign corporations, of the Tax Code of 1997, Section 173, as presently worded, imposes the burden of paying the DST upon the parties to the contract and leaves the tax to be paid indifferently by either party, even if it is a non-resident corporation. Such being the case, the Loan Agreement entered into by and between TIP! and TIIL dated September 28, 2005, is subject to the documentary stamp tax imposed under Section 173 of the Tax Code of 1997, as amended by Republic Act No. 9243, 3 at a rate of (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. Accordingly, BIR Ruling Nos. DA-107-01, DA-111-01, DA-156-02, DA-097-03, and all other rulings inconsistent herewith are hereby declared void. This ruling is issued on the basis of the foregoing facts as represented. However, if upon 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. This law took effect on January 13, 1994, 2. This law took effect on January 1, 1998. 3, Republic Act No. 9243 — An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)