DA ITAD BIR Ruling No. 140-06

November 8, 2006 DA ITAD BIR RULING NO. 140-06 Article 11 Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-27-06 Gramata & Associates Law Office 2nd Floor, FCC Building 7494 Santillan Street 1230 Makati City Attention: Mr. Delfin N. Gramata Gentlemen : This refers to your application for relief from double taxation dated March 14, 2006, requesting confirmation on behalf of your client, T & S Laser Solutions, Inc . (hereinafter referred to as "TLS") that the interest arising from its loan in the amount of Forty Six Million Japanese Yen (JpY46,000,000.00) from T & S, Inc . (hereinafter referred to as " T&S ") to be financed by the Japan Bank for International Cooperation (JBIC), a financial institution wholly owned by the Japanese government, is exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Japan tax treaty. It is represented that T&S is a nonresident foreign corporation duly organized and existing under the laws of Japan with principal address at 256-1, Ukizuka, Yashio City, Saitama Pref. Japan; that T&S holds 99.97% of the total subscribed shares of TLS, a corporation duly organized and existing under the laws of the Philippines with principal address at Lot-44 First St., First Philippine Industrial Park, Sta. Anastacia Sto. Tomas, Batangas; that TLS is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-62. It is further represented that on October 13, 2005, T&S and TLS entered into a Loan Agreement whereby the former granted to the latter the principal loan in the amount of Forty Six Million Japanese Yen (JpY46,000,000.00) with an interest rate of One and 60/100 percent (1.6%) per annum; and that sometime in December of 2005, a certification was issued by the JBIC to the effect that on October 28, 2005, T&S obtained a loan in the amount of JpY46,000,000.00 to be used to finance the loan that T&S as lender, made available to TLS as borrower, per Loan Agreement dated October 13, 2005. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. DHEACI 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of the Contracting 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 of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding, the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. (Emphasis supplied) For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: (a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; (b) In the case of the Philippines, the Development Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 5. The term "interest" as used in this Article means income derived 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." Based on the above provisions, interest derived in the Philippines by the Government of Japan including its political subdivisions, local authorities and financial institutions; or from debt-claims guaranteed or indirectly financed by a financial institution wholly owned by the Japanese government, shall not be subject to Philippine income tax. TcEDHa In the instant case, however, it should be noted that the Loan Agreement in the amount of JpY46,000,000.00 from which the subject interest is derived is solely by and between T&S and TLS, and, there is nothing therein which, as represented, provides that JBIC guarantees or shall finance indirectly, the said loan of TLS. While it is true that the amount of JpY46,000,000.00 which T&S lent to TLS came from JBIC, still, such amount was obtained by T&S through another loan agreement it executed with JBIC on October 28, 2005. Therefore, it cannot be said that the subject interest is derived from a loan which was indirectly financed/guaranteed by the JBIC. The second loan agreement between T&S and JBIC is a separate and distinct loan agreement from that executed between T&S and TLS. This is so notwithstanding a certification from JBIC that the amount of JpY46,000,000.00 borrowed by T&S shall be used by the latter to finance a loan made by TLS. In view of all the foregoing, this Office is of the opinion and so holds that the interest derived from the Loan Agreement between T&S and TLS dated October 13, 2005 is subject to the preferential tax rate of 15% of its gross amount, pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-27-06 dated March 16, 2006) Moreover, the said Loan Agreement is subject to documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended , at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. This ruling is issued on the basis of the foregoing 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service