DA ITAD BIR Ruling No. 166-06

December 15, 2006 DA ITAD BIR RULING NO. 166-06 Article 11, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-68-03 Isla Lipana & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: George J. Lavadia Principal, Tax Services Gentlemen : This refers to your letter dated April 18, 2006, on behalf of your client Totoku Philippines, Inc. (TPI) requesting confirmation of your opinion that the interest payments made by TPI to Totoku Electric Company Ltd. (TEC), are subject to the preferential tax rate of 15%, pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. It is represented that TEC is a corporation with office address at 3-21 Okubo 1-Chome, Shinjuku-ku, Tokyo, Japan and is a resident of Japan for the purpose of Japan taxation and registered as a taxable person in Japan under tax reference number 382019, per Certification dated November 16, 2005, issued by the Chief of Shinyuku District Taxation Office in Japan; 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 February 2, 2005; that TPI is a corporation duly organized and existing under the laws of the Philippines with office address at Lot Bl-3 Rd., Carmelray Industrial Park II Brgy. Tulo Calamba City; that it was registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise on April 28, 1999; that on August 28, 2001 TPI and TEC entered into a Loan Agreement wherein TPI borrowed from TEC an amount of Nine Hundred Thousand US Dollars (US$900,000) with an interest rate of 4.74% per annum; and that the Agreement has a term of three years. 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. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: CHDAEc 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. xxx xxx xxx 5. 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. xxx xxx xxx" Based on the above-quoted provision of the Philippines-Japan tax treaty, the preferential tax rate to be withheld by TPI on its interest payments to TEC under their Loan Agreement shall be fifteen percent (15%) of the gross amount of the interest since it is not paid in respect of Government securities or bonds or debentures. (BIR Ruling No. DA-ITAD-68-03 dated May 5, 2003) Moreover, the Loan Agreement between TPI and TEC dated August 28, 2001 is subject to documentary stamp tax imposed under Section 180 of the National Internal Revenue Code (NIRC) of 1997 at a rate of Thirty Centavos (P0.30) on each of Two Hundred Pesos (P200), or fractional part thereof, of the face value of such contract. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service