Batino Realty Corporation

July 2, 2009 BIR RULING [DA-(C-108) 340-09] Sec. 27 (A); (D) (1); RR 2-98 Batino Realty Corporation Block 5, Calamba Premiere International Park Calamba, Laguna Attention: Benjamin T. Bacorro President Gentlemen : This refers to your letter dated June 4, 2009 requesting for a ruling that the income payment made by your company, Batino Realty Corporation (BRC), to a PEZA-registered enterprise enjoying tax incentives is not subject to withholding tax under Revenue Regulations (RR) 2-98, as amended. It is represented that BRC is a domestic corporation organized under the laws of the Philippines engaged in the real estate business with office address at Block 5, Calamba Premier International Park (CPIP), Calamba, Laguna. Its equity structure consists of a 40% shareholding by Samsung Electronics Manufacturing Corporation (SEPHIL), its parent company, and 60% holdings by Banco de Oro as trustee for the SEPHIL Employees Retirement Fund. BRC is not considered as Top 10,000 (now Top 20,000) corporation during 2007. On January 15, 2003, BRC entered into a loan agreement amounting to Php244,583,559.00 with SEPHIL, a PEZA-registered enterprise engaged in the manufacture of electronic products enjoying the 5% preferential tax regime. Under the Agreement, BRC will pay SEPHIL an annual interest of Php11,229,177.00 for a period of fifty (50) years. The proceeds of the loan were used for the acquisition of parcels of land within CPIP to be leased by SEPHIL for the building construction for SEPHIL operation. You now request for opinion that the foregoing income payment is not subject to final withholding tax (FWT) under Section 2.57.1 of RR 2-98, as amended. Neither is it subject the creditable withholding tax (CWT) under Section 2.57.2 of the same RR since SEPHIL is a PEZA-registered enterprise enjoying exemption from income taxes. In reply, please be informed that Section 27 (D) (1) of the Tax Code of 1997, as implemented by Section 2.57.1.(G) (1) of RR 2-98, provides that a final tax at the rate of 20% will be imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements derived from sources within the Philippines. The foregoing provision is clear that FWT shall only apply to interest income derived on bank deposits, deposit substitutes, trust funds and similar arrangements. In the instant case, the interest income derived by SEPHIL pertains to the interest on loan it extended to an affiliate domestic realty corporation. As such, it cannot be considered as interest from a currency deposit or placement with banks. Neither can it be said that it is a form of monetary benefit from a deposit substitute, trust fund and similar arrangements. A deposit substitute is defined in Section 22 (Y) of the Tax Code as an alternative form of obtaining funds from the public (which the Tax Code defines as 20 or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement or acceptance of debt instruments for the borrower's own account, for purposes of re-lending or purchasing of receivable and other obligations, or financing their own needs or the needs of their agents or dealers. In BIR Ruling No. 116-98 dated July 30, 1998, this Office had extensively discussed the phrase "similar arrangement" in relation to "deposit substitute", as follows: "For the purpose therefore, of understanding the phrase similar arrangement in relation to the phrase "interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes", Section 2 of Revenue Regulations No. 17-84 (Income Taxation of interest income derived from deposits and yield from deposit substitutes) defines "(h) "Deposit substitutes" shall mean "(i) In case of banks and non-financial intermediaries, all alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement, acceptance of debt instruments for the borrower's account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to promissory notes, repurchase agreements, certificates of assignment or participation, and similar instruments with or without recourse as may be authorized by the Central Bank of the Philippines. "(ii) In case of finance companies, other than those specified in (i) above, lending investors, investment houses, thrust companies and similar institutions and corporations engaged in commercial, industrial, and other activities, all borrowings to finance its own needs or the needs of its agents thru commercial papers issued as evidence of indebtedness with Securities and Exchange Commission of the Philippines, or not regardless of maturity period and with or without recourse basis. "(iii) In the case of other non-financial companies, including the national and local government and its instrumentalities, all borrowings through the issuance of debt instruments denoted as treasury bonds, treasury bills, treasury notes, and similar instruments." SEHTIc Conclusively, the term "similar arrangement" must necessarily be within the context of the foregoing definitions. But since the activity of borrowing and lending is exclusive to BRC and SEPHIL, it cannot be categorized as activity falling under "similar arrangement". On the other hand, a trust fund is defined as an amount of money or property administered by an individual or an organization for the benefit of the grantor or another individual or organization. A trust fund is established with the intention to provide income for the beneficiaries during the life or after the death of the grantor. Following this definition, the Agreement between BRC and SEPHIL cannot in any way be considered as a trust fund or a similar trust arrangement as it does not create any form of trusteeship between the parties. Based on the foregoing, since the interest income derived by SEPHIL does not fall within the scope of "bank deposits", "deposit substitutes" or "trust fund" or a "similar arrangement" under Section 27 (D) (1) of the Tax Code, this Office accordingly confirms your opinion that the interest payment made by BRC to SEPHIL pursuant to the loan agreement is not subject to final withholding tax. On the matter of whether the payment of interest to SEPHIL is subject to creditable withholding tax, please be informed that Section 2.57.5 (B) (2) of RR No. 2-98, as amended by RR Nos. 3-2004 and 8-2005, is explicit in its provisions that the creditable withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes such as PEZA-registered enterprises. This Office has already clarified, however, that the above exemption is applicable only to income received by the PEZA-registered enterprise in connection with its registered activity. (BIR Ruling No. DA-124-08 dated March 4, 2008) Considering that SEPHIL, the income recipient, is engaged in the manufacturing of electronic products, it is evident that the income payment it received arising from the loan it extended to BRC has no connection with its registered activity. Consequently, the exemption provided under Section 2.57.5.(B) (2) of the RR cannot be used as basis to support your position that the income payment made by BRC is exempt from CWT. This, notwithstanding, it is a settled rule in withholding tax regulations that payments only to persons enumerated therein are subject to the creditable withholding tax system. Considering that BRC is not among the top ten thousand corporations specified to withhold tax on income payments made to their suppliers, such payment of interest income to SEPHIL is, therefore, not subject to the CWT imposed under Section 2.57.2 of RR 2-98, as amended. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service