DA ITAD Bir Ruling No. 107-09

December 2, 2009 DA ITAD BIR RULING NO. 107-09 Article 11 (Interest); Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD 50-08 Salvador and Associates Attorneys-At-Law 815-816 Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Atty. Maria Rosario L. Bernardo Atty. Adan T. Delamide Atty. Ian Dominic Pua Gentlemen : This refers to your letter dated December 12, 2008 requesting confirmation that the interest to be paid by Nestl Philippines, Inc. (Nestl Philippines) to Nestl TC Asia-Pacific Pte. Ltd. (Nestl Singapore) under an Agreement for Participation in the Regional Pooling Arrangement under a Loan Credit Facility is subject to income tax at the rate of 15 percent based on the gross amount thereof, pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Singapore tax treaty) . 1 Basic Facts It is represented that Nestl Singapore is a corporation organized and existing under the laws of Singapore, based on its Certificate of Residence dated April 5, 2008 issued by the Inland Revenue Authority of Singapore; that Nestl Singapore is situated at 15A Changi Business Park Central 1, No. 05-02/03 Eightrium @ Changi Business Park, Singapore; that Nestl Singapore is not registered as a corporation or as a partnership in the Philippines based on a Certification of Non-Registration of Corporation/Partnership dated November 20, 2008 issued by the Securities and Exchange Commission (SEC); that, on the other hand, Nestl Philippines is a corporation organized and existing under the laws of the Philippines, situated at 31 Plaza Drive, Rockwell Centre, Makati City, Philippines. It is also represented that on July 22, 2007, Nestl Singapore and Nestl Philippines entered into an Agreement for Participation in the Regional Pooling Arrangement under a Revolving Loan Credit Facility wherein Nestl Singapore granted Nestl Philippines a revolving credit facility amounting to 22 Billion Japanese Yen the purpose of which is for Nestl Philippines to finance its fluctuating capital requirements and eligible expenditures as allowed by the Bangko Sentral ng Pilipinas ; that the loan will bear interest at a floating rate equivalent to the Japanese Yen London Interbank Offer Rate (LIBOR) (as published on Reuters page LIBOR01 value date on the day of the drawdown) plus a margin of 75 basis points (or Japanese Yen LIBOR plus 0.75 percent), to be paid on the maturity of the loan; that the loan will mature in one year and will be automatically renewed for another one year, unless terminated earlier by either party, by that party giving a written notice of termination to the other party at least 10 working days before the intended effective date of termination; and that the loan and any accrued and outstanding interests thereon will be repaid immediately upon such termination. TcDaSI It is further represented that based on the letter dated September 29, 2008, issued by Citibank Manila (at 8741 Paseo de Roxas, Makati City, Philippines), an amount of 700,000,000.00 Japanese Yen from Nestl Singapore (through Citibank Tokyo) was credited to the account of Nestl Philippines (Japanese Yen Savings Account No. 5/590630/013) at the said bank on September 26, 2008; and that the said amount was then converted to United States Dollars (US$6,630,043.57) and credited to another account of Nestl Philippines (United States Dollars Current Account No. 5/590630/012) at the said bank on the same day. Ruling A. On income tax In reply, please be informed that a foreign corporation like Nestl Singapore , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this case, since Nestl Singapore is not registered as a corporation or as a partnership in the Philippines, based on the Certification dated November 20, 2008 issued by the SEC, and as such is not engaged in trade or business in the Philippines, such interest on loans arising in the Philippines and derived by Nestl Singapore is generally subject to income tax in the Philippines at the rate of 20 percent based on the gross amount thereof. Section 28 (B) (5) (a) of the Tax Code of 1997, as amended, provides: EIAHcC "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (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;" However, any income derived by Nestl Singapore in the Philippines may be exempt from income tax (or partially exempt if subject only to a reduced income tax rate) if the same is so exempt (or partially exempt ) as required by any treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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." cSCTEH With respect to a treaty that may be invoked by Nestl Singapore and other residents of Singapore, there is the Philippines-Singapore tax treaty. Article 11 of this treaty provides: "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 percent 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. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on in the other Contracting 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. CSaITD 5. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, a statutory authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 6. Where, owing to special relationship between the payer and the recipient or between both of them and some other person, the amount of interest paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 7. Notwithstanding the provisions of paragraph 2: a) interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured, by such institutions as are specified and agreed in letters exchanged between the competent authorities of the Contracting States; and b) the Philippine tax on interest arising in the Philippines in respect of public issues of bonds, debentures or similar obligations and paid by a company which is a resident of the Philippines to a resident of Singapore shall not exceed 10 per cent of the gross amount of the interest." HACaSc Under paragraph 2 and subparagraph (b) of paragraph 7, interest arising in the Philippines and paid to a resident of Singapore may be subject to income tax in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the interest if it is paid by a company resident of the Philippines with respect to public issues of bonds, debentures, or other similar obligations of the company, and (b) 15 percent of the gross amount of the interest in all other cases. Under subparagraph (a) of paragraph 7, such interest may be exempt from income tax if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured, by such institutions in Singapore as are specified and agreed in letters exchanged between the competent authorities of the Philippines and Singapore. Accordingly, such interest to be paid by Nestl Philippines to Nestl Singapore under the Agreement for Participation in the Regional Pooling Arrangement under a Revolving Loan Credit Facility dated July 22, 2007 is subject to income tax in the Philippines at the rate of 15 percent based on the gross amount thereof. (BIR Ruling No. DA-ITAD 50-08 dated July 9, 2008) The interest in question cannot be subject to the lower rate of 10 percent or be exempt from income tax under paragraph 7, Article 11 of the Philippines-Singapore tax treaty because the conditions laid down in availing this more preferential tax treatment are not present in the instant case. B. On documentary stamp tax Finally, the subject Agreement between Nestl Philippines and Nestl Singapore is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended, which provides: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. caEIDA For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." 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 Footnotes 1. Signed on August 1, 1977, and effective January 1, 1977.