DA ITAD BIR Ruling No. 107-07

November 16, 2007 DA ITAD BIR RULING NO. 107-07 Art. 11, Philippines-Netherlands tax treaty; BIR Ruling No. DA-ITAD-123-02 Angara Abello Concepcion Regala Cruz Law Offices ACCRA Building 122 Gamboa St., Legaspi Village 0770 Makati City Attention: Ruby Rose J. Yusi Rudyard S. Arbolado Elaine Patricia S. Reyes Gentlemen : This refers to your letter dated January 22, 2007 on behalf of your client, BELEGGINGSMAATSCHAPPIJ BROEM B.V. (hereinafter referred to as "BBBV"), requesting confirmation that the interest income on the loan obtained by Asset Pool A (SPV-AMC) Inc. (hereinafter referred to as "APA") from BBBV shall be subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 11 of the Convention Between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Netherlands). cDICaS It is represented that BBBV is a nonresident foreign corporation duly organized and existing under the laws of the Netherlands with office address at Naritaweg 165, 1043 BW Amsterdam as certified by the Tax Customs Administration of the Netherlands on November 13, 2006; that it is not registered either as a corporation or as a partnership per Certification of Non-registration of Corporation/Partnership issued by the Securities and Exchange Commission dated January 16, 2007; that, on the other hand, APA is a corporation duly organized and existing under the laws of the Philippines with office address at Units 1115-1116, Ayala Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue corner Paseo de Roxas, Makati City; that APA is organized as a special purpose vehicle corporation under Republic Act No. 9182 otherwise known as the Special Purpose Vehicle Act of 2002. HETDAC It is further represented that BBBV and APA executed two (2) loan agreements whereby BBBV extended loans to APA as follows: 1) loan agreement dated September 30, 2005 in the principal amount of Fifty-one Million Six Hundred Thousand United States Dollars (US$51,600,000.00) at the rate of 13.5% per annum, and, 2) loan agreement dated July 6, 2006 for an additional amount of Twenty-five Million Five Hundred Thousand United States Dollars (US$25,500,000.00) at the rate of 13.5% per annum; that both loans were respectively approved by the Bangko Sentral ng Pilipinas (BSP) on September 1, 2005 and May 12, 2006, and that the transaction subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. CTSHDI In reply, please be informed that Article 11 of the Philippines-Netherlands tax treaty provides, viz : "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount 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 any other financial institution, ADHCSE (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. AHCETa xxx xxx xxx 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but 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 in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 6. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient of the interest, being a resident of one of the States, carries on in the other State in which the interest arises, a trade or business 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 Article 14, as the case may be, shall apply. cDAEIH xxx xxx xxx" Based on the foregoing, interest arising from the Philippines and paid to a resident of the Netherlands which does not have a permanent establishment in the Philippines will be taxed at a preferential rate not exceeding ten percent (10%) of the gross amount of interest if paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or, on any loan of whatever kind by a bank or any other financial institution, or, with respect to public issues of bonded indebtedness; or exempt from income tax if the interest is derived, guaranteed or insured by the Netherlands government or an instrumentality thereof or by other institutions as may be mutually agreed upon by the competent authorities of the Philippines and the Netherlands. In all other cases, a tax rate not exceeding fifteen percent (15%) of the gross amount of interest shall apply. TADIHE Such being the case, this Office is of the opinion and so holds that since BBBV is not engaged in business in the Philippines through a permanent establishment situated therein, and the interest is neither with respect to public issues of bonded indebtedness nor derived, guaranteed or insured by the Netherlands government or an instrumentality thereof, the interest income to be paid by APA to BBBV under the 2 subject loan agreements shall both be subject to a preferential tax rate of 15%, based on the gross amount thereof pursuant to Article 11 (2) (b) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-123-02 dated July 17, 2002) Moreover, the subject loan agreements 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 full amount of the documentary stamp tax due is placed upon the parties to the contract and leaves the tax to be paid indifferently by either of the parties. Provided, however, that as between themselves, the said parties may agree on who shall be liable or how they may share on the cost of the tax. However, whenever one of the parties to the taxable transaction is exempt from the tax, the other party thereto who is not exempt shall be the one directly liable to the tax. (Section 3 (a) and (b), Revenue Regulations (RR) No. 9-2000) TSCIEa In the case, however, of the documentary stamp tax on certificates of indebtedness/loan agreements, the tax shall be remitted by the person who issued the instrument. (Section 3 (c) (1), RR 9-2000) In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the loan agreements must be paid and the corresponding return thereon be filed by BBBV in accordance with the provisions of the Revenue Regulations No. 9-2000 (Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions) and the Tax Code, as amended. This ruling is issued on the basis on 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. HAaDTE Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner