BIR Ruling [DA-359-98]

August 04, 1998 BIR RULING [DA-359-98] Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George J . Lavadia Principal Tax and Corporate Services Gentlemen : This refers to your letter dated February 12, 1998 in effect requesting for a ruling to the effect that the interest payments on the yen loan obtained by your client, Kanepackage Philippine Inc. (KPI) from Kanepackage Co., Ltd. (KCL) shall be subject to the 15% final withholding tax pursuant to the RP-Japan Tax Treaty. LibLex It is represented that KPI is a domestic corporation duly registered with the Securities and Exchange Commission while KCL is a non-resident foreign corporation organized and existing under the laws of Japan; that KCL is not engage in trade or business in the Philippines; that on January 29, 1996, KPI obtained a yen loan from KCL amounting to JY79,680,001.00; that said loan will be used mainly to finance the importation of capital equipment, construction of the plant and the operations of KPI for a period beginning January 29, 1996 until August 31, 1999; that the said loan is subject to the payment of interest at the rate of 3.5% per annum; and that in support of your request, you submitted to this Office the following documents: 1) duly accomplished BIR Application Form TC-001; 2) Certificate of Incorporation of Kanepackage Philippine, Inc.; 3) copy of the Loan Agreement between KPI and KCL; 4) and Certification from the Securities and Exchange Commission. In reply, please be informed that under Article 11(2) of the RP-Japan Tax Treaty, stating "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 Contracting State. "(2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; (b) 15 per cent of the gross amount of interest in all other cases." the interest payments made by KPI to KCL are subject only to the 15% preferential tax rate, since the payee, KCL is the beneficial owner of the interest income received from KPI and the interest income was not generated from government securities, bonds or debentures. (BIR Ruling No. 145-95 dated September 13, 1995) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different then this ruling shall be considered null and void. aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)