DA ITAD BIR Ruling No. 059-10

June 8, 2010 DA ITAD BIR RULING NO. 059-10 Article 10 Philippines-United Kingdom Tax Treaty; BIR Ruling No. 142-94; BIR Ruling No. DA-ITAD 078-01; BIR Ruling No. DA-ITAD 091-08; BIR Ruling No. DA-ITAD 051-09 Villanueva Nuez & Associates MetroLaw Legal Offices, 810 Antel Global Corporate Center, Julia Vargas Avenue, Ortigas Center, 1610 Pasig City Attention: Rodeo J. Nuez, Jr. Legal Counsel Gentlemen : This refers to your letter dated November 21, 2008, in behalf of your client, Schuurmans & Van Ginneken Philippines, Inc. (Schuurmans) , requesting confirmation of your opinion that the interest payments made by Schuurmans in favor of ED & F Man Treasury Management PLC (ED & F) is subject to a 15 percent preferential tax rate, pursuant to the Philippines-United Kingdom tax treaty. It is represented that ED & F, with registered office at Cottons Centre, Hay's Lane, London, SE1 2QE, is a resident in the United Kingdom for the purposes of United Kingdom Corporation Tax and is liable to United Kingdom Corporation Tax on all of its income, regardless of where it arises, including dividend and interest arising in countries outside the United Kingdom within the meaning of the Philippines-United Kingdom Double Taxation Agreement as evidenced by the Certificate of Residence issued by the HM Revenue & Customs, Ipswich, United Kingdom dated October 24, 2008; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated November 5, 2008; that Schuurmans is a corporation duly organized and existing under the laws of the Philippines, under SEC Registration No. CS200323696, with principal office at Rm. B-6 WSC Building, Locsin Street corner San Sebastian Street, Bacolod City, Philippines. It is further represented that Schuurmans and ED & F entered into an Agreement on August 6, 2004 under which ED & F agrees to make available to Schuurmans the "Facilities" on a committed basis, which comprises the following: a credit facility, a deposit facility and a foreign exchange facility; that on November 3, 2008, Schuurmans received from ED & F, Four Hundred Thousand US Dollars (US$400,000.00), which was subsequently converted to Philippine Peso at the rate of PhP48.75/US$1.00 or the equivalent of PHP19,500,000.00, and that this will be credited to the Account of Schuurmans, as evidenced by the Certificate of Inward Remittance issued on November 27, 2008 by Wilfredo E. Trinidad, Banking and Cash Operations Head, and Jonathan R. Salazar, Global Payments Officer, Deutsche Bank AG, Manila Branch; 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. HEIcDT In reply, please be informed that Section 28 (B) (5) (a) 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. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; 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 income 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. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-United Kingdom tax treaty which, in its Article 10, provides: "Article 10 INTEREST 1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. 4. Notwithstanding the provisions of paragraphs 2 and 3 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: a) the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term 'instrumentality' as used in this paragraph means any agency or entity created or organized by either Contracting Government in order to carry out governmental functions. 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. HTSIEa 6. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" As such, interest arising in the Philippines and paid to a resident of the United Kingdom may be subject to Philippine tax at a rate not to exceed 15 percent of the gross amount of the interest; or 10 percent if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations; or exempt if the interest is derived and beneficially owned by the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State, or a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. Accordingly, the interest paid by Schuurmans to ED & F under the subject Credit Facility, as evidenced by the proof of inward remittance, shall be subject to tax at the rate of 15 percent, based on the gross amount thereof, pursuant to Article 10 (2) of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 142-94 dated September 20, 1994; BIR Ruling No. DA-ITAD 078-01 dated September 19, 2001; BIR Ruling No. DA-ITAD 091-08 dated November 5, 2008; BIR Ruling No. DA-ITAD 051-09 dated April 30, 2009) Moreover, the Agreement executed by and between them shall be subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997 (Tax Code), as amended. The same Tax Code also provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable for the tax. In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the Credit Facility must be paid and the corresponding return thereon be filed by either Schuurmans or ED & F in accordance with the aforementioned provision of the Tax Code and Revenue Regulations No. 9-2000 (Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions). 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. STaCIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner