Relief to Certain Banks and Bankers Incurring Delinquency Penalties

November 23, 2005 ITAD RULING NO. 144-05 Articles 10 & 12 Philippines-Norway tax treaty BIR Ruling Nos. DA-ITAD 44-03; 25-03; BIR Ruling Nos. DA-ITAD 129-03; 78-05 Cabaero Katigbak Clemente & Co.,CPAs 4th Floor, Saville Building 8728 Paseo de Roxas, Makati City Attention: Ma. Cecilia C. Katigbak Partner Gentlemen : This refers to your letter dated June 10, 2003 requesting confirmation of your opinion on the following: (a) that the royalty payment by GenoMar Supreme Philippines, Inc. (GSPI), to GenoMar ASA shall be subject to ten percent (10%) final tax; (b) that the interest rate of six percent (6%) on the loan is allowed by the Tax Code of 1997 (Tax Code) even if such rate is below the prevailing market rate, and thus, GSPI can claim it as deduction for its income as provided in Section 34(B) of the Tax Code and; (c) that the interest payment on the loan shall be subject to 15% final tax as provided in Philippines-Norway tax treaty instead of the 20% final tax as provided in Section 28(B) of the Tax Code. It is represented that GenoMar ASA is a nonresident foreign corporation organized and existing under the laws of Norway with business address at Gaustadalleen 21, 0349 Oslo, 0301 Oslo, Norway; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 8, 2003; that GSPI (formerly Biosoft Philippines, Inc.) is a domestic corporation organized and existing under the laws of the Philippines and a wholly owned subsidiary of GenoMar ASA with principal office located at Km. 94, Brgy Prado, Lubao, Pampanga; that GSPI is an enterprise registered with the Board of Investments (BOI) and engaged in a pioneer area of investment per Certificate of Registration No. DP 2001-005 dated January 4, 2001; that GSPI is engaged in the business of conducting technological research and development activities of genetically superior brood stock and other by-products of aquaculture industry and promotes the marketing of said products more specifically, the breeding and hatching of high breed tilapia known as the "Genomar Supreme Tilapia";that on May 16, 2001, GSPI and GenoMar ASA entered into a Breeder Supply and Royalty Agreement (Agreement) which became effective immediately upon signing by both parties and shall continue to be in force and effect until terminated by either party based on the conditions stated therein; that the Agreement granted to GSPI the limited right to license "Genomar Supreme Tilapia" breeders and to license tilapia breeders to local farmers (referred as hatcheries) for the hatching of fingerlings; that as remuneration for the limited right to license the breeders for hatching of fingerlings, the hatcheries will pay royalty to GSPI, on sale of fingerlings equivalent to an average of 12% (which may vary between 10% to 14%) of gross income on sales of hatcheries; that GSPI will pay 25% of all royalty received from hatcheries as royalty to GenoMar ASA. cCHETI It is further represented that on March 10, 2003, GSPI entered into a Memorandum of Agreement (MOA) and a Loan Agreement with GenoMar ASA to finance the research and development, pre-operating expenses and other projects of the former; that under the MOA the amount of Nineteen Million Nine Hundred Fifty-One Thousand Six Hundred Sixty-Six Pesos (P19,951,666.00),which constituted advances by GSPI from Genomar ASA, was converted into a short term loan (with a term of 2 years from March 2003);that a separate Loan Agreement delineating the details of the transaction as mutually agreed to by the parties was executed in March 2003; that under the Loan Agreement, GenoMar ASA agreed to grant a loan to GSPI in the aggregate principal amount of Three Hundred Seventy Thousand US Dollars (US$370,000) for a loan period of two (2) years; and that the loan shall bear interest on the outstanding balance of the principal amount drawn at the rate of six percent (6%) per annum. In reply, please be informed that with regard to royalties, the Philippines-Norway tax treaty provides: "Article 12 "ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State if such resident is the beneficial owner of the royalties. "2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, when the royalties are taxable in the other Contracting State, the tax so charged shall not exceed. a) in Norway, 10 per cent of the gross amount of the royalties including rentals or the rates referred to in subparagraph 2(b)(ii) below, and b) in the Philippines, (i) 25 per cent of the gross amount of the royalties, including 25 per cent of the gross rentals or amount paid for the use of, or the right to use, motion picture films, films or tapes for radio or television broadcasting; (ii) 7.5 per cent of the gross rentals or amount paid for the use of or the right to use containers, or (iii) the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid in similar circumstances to a resident of a third State. "3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Norway, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. SHECcD "4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. "xxx xxx xxx." Based on the foregoing, royalty payments arising in the Philippines and received by a resident of Norway shall be subject to 25% of the gross amount of such royalties, including 25% of the gross rentals or amount paid in respect of the use of, or the right to use, motion picture films, films or tapes for radio or television broadcasting, 7.5% of the gross rentals or amount paid for the use of or the right to use containers, or the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid in similar circumstances to a resident of a third State, and 10% if the Philippine company paying the royalties is a BOI-registered enterprise engaged in preferred pioneer areas of investments under the investment laws of the Philippines. Such being the case, and since GSPI is registered with the BOI as a pioneer enterprise in the breeding and hatching of high breed tilapia, this Office hereby confirms your opinion that the royalty payments by GSPI to Genomar ASA under the Breeder Supply and Royalty Agreement are subject to the preferential tax rate of 10%, based on the gross amount of royalties, pursuant to Article 12(3) of the Philippines-Norway tax treaty. (BIR Ruling No. DA-ITAD 44-03 dated March 10, 2003) Moreover, the royalty payments and the service fees for the actual services rendered in the Philippines paid by GSPI to Genomar ASA are subject to 10% value-added tax pursuant to Section 108 of the Tax Code of 1997. Accordingly, GSPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 10% VAT on such fees before making any payment to Genomar ASA. In remitting the VAT withheld, GSPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from GSPI if it is a VAT-registered taxpayer. In case GSPI is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased or treated as "expense", or "asset" whichever is applicable. In addition, GSPI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon the request of Genomar ASA, the first three copies thereof be given to Genomar ASA and the fourth copy to be retained by GSPI as its file. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] As regards the issue on interest, Article 10 of the Philippines-Norway tax treaty provides: "Article 10 "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. cEAaIS "2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State; but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. "xxx xxx xxx "4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xxx xxx xxx" Interest is generally taken to mean remuneration on money lent being remuneration coming within the category of income from movable capital. The term designates in general, income from debt claims of any kind, whether or not secured by mortgage and whether or not carrying rights to participate in profits. The term "debt claims" of every kind obviously embraces cash deposits and security in the form of money, as well as government securities and bonds and debentures, although the latter three are especially mentioned because of their importance and of certain peculiarities that they may present. (OECD Model Tax Convention) Such being the case, the interest income to be remitted by GSPI to Genomar ASA relative to the Memorandum of Agreement and the Loan Agreement is subject to the preferential tax rate of 15% Philippine income tax based on the gross amount of the interest. (BIR Ruling DA-ITAD No. 25-03 dated January 30, 2003 and BIR Ruling DA-ITAD No. 78-05 dated July 29, 2005) Moreover, the Memorandum of Agreement (MOA) and the Loan Agreement executed by and between GSPI and Genomar ASA both dated March 10, 2003 shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997 at a rate of Thirty Centavos (P0.30) on each Two Hundred Pesos (P200), or fractional part thereof, of the face value of such Agreements. However, the serial promissory notes which shall be executed by GSPI payable to the order of Genomar ASA to repay the loan and the interests thereon from March 20, 2004 to March 10, 2005 shall be subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243 1 ,at a rate of One Peso (P1.00) on each Two Hundred Pesos (P200),or fractional part thereof, of the issue price of said Loan Agreement. Regarding the issue on whether GSPI can claim the interest paid on the loan as deduction from its income as provided in Section 34 (B) of the Tax Code, please be informed that this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer to treat it as a deductible item, the allowance of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34(A)(1)(b) of the Tax Code. (BIR Ruling No. DA-ITAD 129-03) This ruling is issued on the basis of 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. ATHCac Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service