Local Government Code of 1983

October 12, 2010 ITAD BIR RULING NO. 050-10 Article 11, Philippines-Singapore tax treaty; BIR Ruling No. 127-98; BIR Ruling No. DA-ITAD-020-00; BIR Ruling No. DA-ITAD-047-00; BIR Ruling No. DA-ITAD-086-00; BIR Ruling No. DA-ITAD-128-00; BIR Ruling No. DA-ITAD-73-10 Dainippon Ink & Chemicals (Philippines), Inc. No. 26 1st Avenue, Bo. Bagumbayan, Tanyag, Taguig, Metro Manila Attention: Mr. Yasuo Suzuki President Gentlemen : This refers to your application for relief from double taxation dated October 17, 2007, on behalf of DIC ASIA PACIFIC PTE LTD. (hereinafter referred to as "DIC Asia Pacific" ), pursuant to the provisions of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Singapore tax treaty" ). AcaEDC It is represented that DIC Asia Pacific is a nonresident foreign corporation duly organized and existing under the laws of Singapore and is a resident in Singapore for income tax purposes for the Year of Assessment 2008, as evidenced by Certificate of Residence issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore dated July 17, 2007, with principal address at 78 Shenton Way #16-01, Singapore 079120; that DIC Asia Pacific is not registered either as a corporation or as a partnership in the Philippines as supported by the Certification of Non-Registration of Corporation/Partnership issued by the Philippines' Securities and Exchange Commission on June 21, 2007; that, on the other hand, DAINIPPON INK & CHEMICALS (PHILIPPINES), INC. (hereinafter referred to as "DIC Philippines" ) is a corporation duly organized and existing under the laws of the Philippines, with office address at No. 26 1st Avenue, Bo. Bagumbayan, Tanyag, Taguig City, Metro Manila; that DIC Asia Pacific owns Five Thousand (5,000) preferred shares and Eight Hundred Thirty Thousand Five Hundred Nine (830,509) common shares out of the Eight Hundred Forty-One Thousand Five Hundred Forty (841,540) total capital stock of DIC Philippines. It is further represented that on July 01, 2007, DIC Asia Pacific and DIC Philippines entered into a Loan Agreement whereby the former will make available to the latter a short term loan denominated in US Dollars (USD) for the working capital of DIC Philippines' operations in the amount of Two Million One Hundred Sixty-Two Thousand One Hundred Sixty-Two 16/100 US Dollars (USD2,162,162.16) or equivalent to One Hundred Twenty Million Pesos (P120,000,000.00) with an interest computed monthly at preferred rate of 4.8% per annum; that the agreed loan period is for six (6) months from draw down date, July 01, 2007 to December 31, 2007 and is renewable for a further period of 6 months from draw down date; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28, paragraph B, sub-paragraphs 1 and 5 (a) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended by Republic Act No. 9337 , provide as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;" However, Section 32 (B) (5) of the same Code provides, viz. : "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 1 xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." EDHCSI Accordingly, Article 11 of the Philippines-Singapore tax treaty provides, viz. : "Article 11 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 in 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. xxx xxx xxx Based on the foregoing, interest income arising from the Philippines and paid to a resident of Singapore shall be taxed in the Philippines at a preferential rate of 15 percent of the gross amount of interest if the recipient of such interest is also the beneficial owner thereof. In view thereof, this Office is of the opinion and so holds that the said interest payments by DIC Philippines to DIC Asia Pacific , the beneficial owner of the interest derived from the Loan Agreement between them, are subject to the preferential tax rate of 15 percent of its gross amount, pursuant to Article 11 (2) of the Philippines-Singapore tax treaty. (BIR Ruling No. 127-98 dated September 08, 1998; BIR Ruling No. DA-ITAD-020-00 dated January 28, 2000; BIR Ruling No. DA-ITAD-047-00 dated February 4, 2000; BIR Ruling No. DA-ITAD-086-00 dated August 1, 2000; BIR Ruling No. DA-ITAD-128-00 dated September 01, 2000; BIR Ruling No. DA-ITAD-73-10 dated July 9, 2010) Moreover, the said Loan Agreement entered into between DIC Asia Pacific and DIC Philippines is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. ATCEIc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. TITLE II TAX ON INCOME.