DA ITAD BIR Ruling No. 096-06

August 22, 2006 DA ITAD BIR RULING NO. 096-06 Article 11, Philippines-Germany tax treaty; BIR Ruling No. ITAD-5-99 Laya Mananghaya & Co. Certified Public Accountants & Management Consultants 22/F, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Francisco C. Tagao Head, Tax & Corporate Services Manuel P. Salvador III Director, Tax & Corporate Services Gentlemen : This refers to your letter dated January 23, 2006, on behalf of your client TSPIC Corporation (TSPIC), requesting confirmation that the interest payments by TSPIC to ATMEL Germany GmbH (ATMEL) are subject to a 15% preferential tax rate pursuant to the Philippines-Germany tax treaty. It is represented that ATMEL, with office address at Theresienstrasse 2, 74072 Heilbronn, Germany, is a resident of the Federal Republic of Germany within the meaning of Article 11 of the Philippines-Germany tax treaty; that it is not registered either as a corporation or as a partnership in Philippines per certification issued by the Securities and Exchange Commission dated September 13, 2005; that TSPIC is a corporation registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 04-60 with office address at Vishay Bldg., Bagsakan Road, FTI Complex, Taguig, Metro Manila. TAECSD It is further represented that on July 1, 2005, TSPIC and ATMEL entered into an Intercompany Term Loan Agreement (Agreement) whereby ATMEL agreed to lend TSPIC the amount of One Million Six Hundred Seventy Three Thousand Forty One and 09/100 US Dollars (US$1,673,041.09) as long-term loan, with an interest rate on the principal balance of the loan equal to USD Libor 3,69 (6 months) +1% rate in effect on the date of the said loan for interest payment in 2005, and interest payment for the succeeding years (year 2006 onwards) will be based on USD Libor (1 year) +1%; that the interest rate from year 2006 onwards shall be adjusted annually based on USD Libor rate at the beginning of the first banking day of January, and will take effect beginning the first day of each year; and that the termination date of the Agreement will be on December 31, 2010. In reply, please be informed that Article 11 of the Philippines-Germany tax treaty provides as follows: "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 the tax so charged shall not exceed: a) 10 per cent if such interest is paid (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of such interest in all other cases. 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived." Based on the aforequoted provisions, interest income by a corporation which is a resident of Germany may be taxed in the Philippines at 10% if it is paid in connection with the sale on credit of any industrial, commercial or scientific equipment; or if the loan is granted by a bank; or in respect of public issues of bonds, debentures or similar obligation; and 15% in all other cases. In view thereof, this Office is of the opinion and so holds that the interest payments to be remitted pursuant to their Agreement shall be subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 11(2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD-5-99 dated June 16, 1999) Moreover, the Intercompany Term Loan Agreement between TSPIC and ATMEL is subject to the documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243, 1 at a rate of One peso (P1.00) on each Two Hundred Pesos (P200) or a fractional part thereof, of the issue price of such loan agreement. 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. acHITE 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)