DA ITAD BIR Ruling No. 080-06

July 25, 2006 DA ITAD BIR RULING NO. 080-06 Article 12 of the Philippines-United States of America tax treaty; BIR Ruling No. DA-ITAD-084-00 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: L.P. Ferrer Partner, Tax Services Gentlemen : This refers to your letter dated October 24, 2005, received by this Office on February 2, 2006, on behalf of your client GOLDEN ARCHES DEVELOPMENT CORPORATION (GADC), requesting confirmation that the interest on loans paid by GADC to MCDONALD'S RESTAURANT OPERATIONS, INC. (MRO), is subject to the preferential final withholding tax rate of 15% pursuant to Article 12(2) of the Philippines-United States of America tax treaty. It is represented that MRO is a corporation organized and existing under the laws of the United States of America with principal address at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19801; 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 November 10, 2005; that GADC is a corporation organized and existing under the laws of the Philippines with principal address at 17th Floor, Citibank Center Building, Paseo de Roxas Avenue, Makati City. It is further represented that on March 17, 2005, GADC and MRO executed a Loan Agreement (Agreement) whereby GADC was granted a loan by MRO in the amount of Twelve Million Dollars ($12,000,000.00) with interest at ten percent (10%) per annum payable in Philippine Peso equivalent thereof; that the loan is evidenced by a Promissory Note issued by GADC in favor of MRO attached to the Agreement; and that the transaction subject of the instant request for a ruling 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 of the taxpayers involved. In reply, please be informed that Article 12 of the Philippines-United States of America tax treaty provides as follows: "Article 12 Interest 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. xxx xxx xxx" 5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal 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 8 (Business Profits) or Article 15 (Independent Personal Services),as the case may be, shall apply. TSIDaH xxx xxx xxx 7. The term 'interest' as used in this Convention 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 Contracting State in which the income arises, including interest on deferred payment sales." xxx xxx xxx" Since MRO is not engaged in business in the Philippines through a permanent establishment situated therein, your opinion that interest earned by MRO from the loan it extended to GADC shall be plainly considered as interest income subject to 15% withholding tax pursuant to Article 12(2) of the Philippines-United States of America tax treaty is hereby confirmed. (BIR Ruling No. DA-ITAD-084-00 dated August 1, 2000) Moreover, the Loan Agreement executed between GADC and MRO 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) for each Two Hundred Pesos (P200) or a functional 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)