DA ITAD BIR Ruling No. 073-10

July 9, 2010 DA ITAD BIR RULING NO. 073-10 Article 11, Philippines-Singapore Tax Treaty; BIR Ruling No. 127-98; BIR Ruling No. DA-ITAD 020-00; BIR Ruling No. DA-ITAD 047-00; BIR Ruling No. DA-ITAD 086-00; BIR Ruling No. DA-ITAD 128-00 Romulo Mabanta Buenaventura Sayoc & Delos Angeles 30th Floor Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Atty. Priscilla B. Valer Partner Gentlemen : This refers to your letter dated April 21, 2009 requesting confirmation of your opinion that the interest payments made by CPL Packing, Inc. (CPL-Philippines) to Cerebos Pacific Limited (CPL-Singapore) under a Loan Agreement are subject to a preferential rate of 15 percent pursuant to Article 11 of the Philippines-Singapore tax treaty. EDIHSC It is represented that CPL-Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore as evidenced by its Business Profile under Registration No. 198104186H; that its principal office is located at #18 Cross Street, #12-01/08 Marsh & Mclennan Centre, Singapore (048423); that CPL-Singapore is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership dated December 8, 2008 issued by the Philippine Securities and Exchange Commission (SEC); that CPL-Philippines is a domestic corporation and a Philippine Economic Zone Authority (PEZA) registered enterprise under Certificate of Registration No. 01-055 dated July 17, 2007. It is further represented that on September 27, 2007, CPL-Philippines entered into a Loan Agreement (Agreement) with CPL-Singapore whereby CPL-Singapore granted CPL-Philippines an advance of Singapore Dollars (SGD)14,300,000; that CPL-Philippines shall be charged interest on a monthly basis based on the 3-month Singapore Interbank Offering Rate (SIBOR) quoted on the last day of each month plus 0.3% spread; that the advance was to be repaid in 12 months but the due date was extended by CPL-Singapore to September 27, 2009 under a Supplementary Loan Agreement dated November 24, 2008; that CPL-Singapore also granted CPL-Philippines a second advance in the amount of SGD8,000,000 under a Loan Agreement dated March 13, 2008 subject to the same interest rate as the first advance; that the date for repayment of the second advance was also extended to September 27, 2009 pursuant to a Supplementary Loan Agreement dated April 13, 2009; 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. 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): Provided, That effective January 1, 2009, 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 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 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. 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 percent of the gross amount of the interest if the recipient of such interest is also the beneficial owner thereof. In view thereof, this Office is of the opinion and so holds that the interest payments by CPL-Philippines to CPL-Singapore, the beneficial owner of the interest on the said loans, are subject to the preferential tax rate of 15 percent based on the gross amount of interest pursuant to paragraph 2 of Article 11 of the Philippines-Singapore tax treaty. (BIR Ruling No. 127-98 dated September 8, 1998; BIR Ruling No. DA-ITAD 020-00 dated January 28, 2000; ITAD Ruling No. DA-ITAD 047-00 dated 086-00 dated August 1, 2000; BIR Ruling No. DA-ITAD 128-00 dated September 1, 2000) DTaAHS 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 Legal & Inspection Group