DA ITAD BIR Ruling No. 050-08

July 9, 2008 DA ITAD BIR RULING NO. 050-08 Article 11, Philippines-Singapore Tax Treaty; BIR Ruling No. DA-ITAD 22-04 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Mark Anthony P. Tamayo Partner, Tax & Customs Services Gentlemen : This refers to your letter dated July 9, 2007 requesting confirmation of your opinion that the interest payments made by Cargill Philippines, Inc. (Cargill-Philippines) to Cargill Asia Pacific Treasury, Ltd. (formerly Cargill Asia Pacific Treasury, Pte. Ltd.) (Cargill-Singapore) under a Loan Agreement are subject to the preferential rate of fifteen percent (15%) under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, in relation to Article 11 of the Philippines-Singapore tax treaty. It is represented that Cargill-Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore as evidenced by its Memorandum and Articles of Association and the Certificate of Incorporation on Conversion to a Public Company issued on November 20, 1996 (converting Cargill Asia Pacific Treasury Pte. Ltd. to a public company and changing the name of the company to Cargill Asia Pacific Treasury Ltd.); that its principal office is located at # 300 Beach Road # 29-04, The Concourse, Singapore; that Cargill-Singapore is not registered either as a corporation or as a partnership as shown in the Certification of Non-Registration dated August 8, 2006 issued by the Philippine Securities and Exchange Commission; that Cargill-Philippines is a domestic corporation with principal office located at 14th Floor, Citibank Tower, Paseo de Roxas, Makati City; and that its primary business purpose is to produce, market, and sell animal feeds. It is further represented that on May 30, 1997, Cargill-Philippines entered into a Loan Agreement (Agreement) with Cargill-Singapore for the purpose of obtaining a revolving credit facility up to a maximum aggregate outstanding amount of One Billion Two Hundred and Sixty Million Japanese Yen (JPY1,260,000,000.00) ("Facility") from which Cargill-Philippines may make multiple drawings from time to time, subject to certain terms and conditions; that the interest on the drawings shall be the Japanese Yen Reference Rate plus 50 basis points per annum (free of any withholding tax); that the rate shall be fixed two (2) business days prior to the drawdown date; and that the issue or transaction subject of the above application 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. EHaCTA In reply, please be informed that the Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997 as amended, applies in general. It provides: "Section 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d): Provided, That effective January 1, 2009, at the rate of income tax shall be thirty percent (30%). xxx xxx xxx However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross and shall be exempt from taxation under this Title: 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. DcITaC xxx xxx xxx" In accordance with the foregoing, Article 11 of the Philippines-Singapore tax treaty provides as follows, to wit: "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 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. TCDHaE 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. xxx xxx xxx" Based on the aforesaid provisions, interest income which arises in the Philippines and paid to a resident of Singapore is taxable in the Philippines at the preferential tax rate not exceeding 15% of the gross amount of the interest if the recipient of such interest is also the beneficial owner thereof. EAcIST In view thereof, this Office is of the opinion and so holds that the interest payments by Cargill-Philippines to Cargill-Singapore, the beneficial owner of the interest on the said credit revolving facility, are subject to the preferential tax rate of 15% based on the gross amount of interest pursuant to paragraph 2 of Article 11 of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD 22-04 dated March 9, 2004) This ruling is issued on the basis of the 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner