DA ITAD BIR Ruling No. 057-06

May 22, 2006 DA ITAD BIR RULING NO. 057-06 Article 11 of the Philippines-Japan tax treaty; BIR Ruling No. 214-82 Enkei Philippines, Inc . Lot 17 Carmelray Industrial Canlubang, Calamba, Laguna Attention: Mr. Ryusuke Onoki Managing Director Gentlemen : This refers to your application for relief from double taxation dated November 11, 2005 seeking to avail of the preferential tax rate of 10% on the interest payments of Enkei Philippines Inc., (Enkei-Phil) to Enkei Corporation (Enkei-Japan), pursuant to Article 11 of the Philippines-Japan tax treaty. It is represented that Enkei-Japan is a corporation duly organized and existing under the laws of Japan, with principal address at Act Tower 26th Floor 111-2, Itayamachi Hamamatsu City, Shizuoka Prefecture, Japan 430-7726; that it is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Residence Certificate dated February 24, 2006, issued by the District Director of Hamamatsunishi Tax Office of Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 24, 2005; that Enkei-Phil is a corporation organized and existing under the laws of the Philippines, with business address at 104 Industry Drive, Carmelray Industrial Park, Canlubang, Laguna, and is registered with the Board of Investments, under a pioneer status under Certificate of Registration No. EP 95-119 dated July 14, 1995. It is further represented that on June 16, 2005, Enkei-Phil issued a Promissory Note in favor of Enkei-Japan for a loan in the amount of Yen Five Hundred Twenty Million (520,000,000.00), which shall accrue an annual interest of 1.7 % per annum to be computed based on the outstanding principal loan amount; that the payment on interests shall be made by Enkei-Phil to Enkei-Japan at the month-end of every quarter of the calendar year which shall commence at the month-end of September 2005; that Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's outstanding indebtedness through Enkei-Japan's designated account on or before June 14, 2007; that on September 30, 2005, Enkei-Phil issued another Promissory Note in favor of Enkei-Japan for a loan in the amount of Yen Six Hundred Million (Y600,000,000.00), which shall accrue an annual interest of 1.7 % per annum to be computed based on the outstanding principal loan amount; that the payment on interests shall be made by Enkei-Phil to Enkei-Japan at the month-end of every quarter of the calendar year which shall commence at the month-end of December 2005; and that Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's outstanding indebtedness through Enkei-Japan's designated account on or before September 30, 2007. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "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 the interest in all other cases. HETDAC (3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest 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 Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. xxx xxx xxx (5) 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. xxx xxx xxx" Based on the aforequoted provisions, interest payments will be taxed at a preferential rate not exceeding ten percent (10%) if the interest is paid in respect of government securities, or bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and in all other cases, fifteen per cent (15%) of the gross amount of the interest. Such being the case and since Enkei-Phil is a pioneer enterprise engaged in preferred pioneer areas of investment under incentive laws of the Philippines, this Office is of the opinion and so holds that the interest payments to be made by Enkei-Phil to Enkei-Japan are subject to a final withholding tax rate of 10 percent of the gross amount of interest, pursuant to Article 11(3) of the Philippines-Japan tax treaty. (BIR Ruling No. 214-82 dated July 15, 1982) Moreover, the above Promissory Notes are subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243, 1 at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof of the issue price of the said Promissory Notes. This ruling is issued on the basis of the foregoing 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Republic Act No. 9243 An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)