DA ITAD BIR Ruling No. 058-06

May 31, 2006 DA ITAD BIR RULING NO. 058-06 Article 11 of the Philippines-Singapore tax treaty; BIR Ruling No. ITAD-21-99; BIR Ruling No. DA-ITAD-78-05 Philippine Japan Active Carbon Corporation Malagamot, Panacan P.O. Box 81316 Davao City Attention: Mr. Masahiko Saeki EVP & Gen. Manager Gentlemen : This refers to your application for relief from double taxation dated August 25, 2005, seeking confirmation on. behalf of your creditor, Japan Bank for International Cooperation (JBIC), that the interest income arising from the Loan Agreement between JBIC and your company Philippine Japan Active Carbon Corporation (PJACC) is exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Japan tax treaty. It is represented that PJACC is a Board of Investments (BOI)-registered (on a non-pioneer status) corporation organized and existing under the laws of the Philippines with principal address at Malagamot, Panacan, Bunawan, P.O. Box 81316 Davao City, Philippines; that on March 31, 2005, PJACC and JBIC entered into a Loan Agreement (Agreement) wherein JBIC agrees to make available to PJACC, on and subject to the terms and conditions of the Agreement, a loan facility in Yen in aggregate amount not exceeding One Hundred and Fifty Million Yen (Y150,000,000); that the proceeds of the loan shall be applied by PJACC for the sole purpose of financing the expenditures directly necessary for the due implementation of the Project having the objective of expanding a production facility for activated carbon. In reply, please be informed that Article 11(4) of the Philippines-Japan tax treaty provides as follows: "Article 11 xxx xxx xxx 4. Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: (a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; (emphasis supplied) (b) In the case of the Philippines, the Development Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub paragraphs (a) and (b) above, as may be agreed from time to time between the Government of the two Contracting States." (emphasis supplied) Moreover, Section 32(B)(7)(a) of the National Internal Revenue Code of 1997 provides, viz : "(B) Exclusion from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: aCIHAD "xxx xxx xxx" "(7) Miscellaneous Items. (a) Income Derived by Foreign Government Income derived from investments in the Philippines in loans , stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (emphasis supplied) "xxx xxx xxx" In view of the foregoing provisions and considering that JBIC is the result of the merger of Export-Import Bank of Japan and Overseas Economic Cooperation Fund, this Office is of the opinion and hereby holds that the interest income that will be derived by JBIC, a financial institution wholly owned by the Japanese Government, from the Loan Agreement it executed with PJACC, is exempt from Philippine income tax. (BIR Ruling No. ITAD-21-99) However, the Loan Agreement entered into by and between PJACC and JBIC dated March 31, 2005 is subject to documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243, 1 at a rate of (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan contract. 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)