DOJ Opinion No. 058, s. 1995

October 24, 2008 DA ITAD BIR RULING NO. 069-08 Article 11; Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 35-04 Enkei Philippines, Inc. 104 Industry Drive Carmelray Industrial Park Canlubang, Calamba City Laguna Attention: Mr. Ryusuke Onoki Managing Director Gentlemen : This refers to your letter dated June 29, 2007 requesting confirmation that interest to be paid by Enkei Philippines, Inc. (hereinafter, Enkei Philippines ) to Mitsubishi Shoji Light Metal Sales Corporation (hereinafter, Mitsubishi Shoji ) is subject to income tax at the rate of 15% of the gross amount thereof under Article 11 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty) . 1 IaCHTS BASIC FACTS It is represented that Mitsubishi Shoji is a corporation organized and existing under the laws of Japan, with address at the 8th Floor, Seiroka Tower, 8-1 Akashicho, Chuo-Ku, Tokyo, Japan; that Mitsubishi Shoji is a resident of Japan within the meaning of the Philippines-Japan tax treaty and is subject to taxation in Japan, based on the Certificate of Residence dated June 13, 2007 issued by the Kyobashi Tax Office in Japan to Mitsubishi Shoji ; that Mitsubishi Shoji is not registered as a corporation or partnership in the Philippines, as evidenced by the Certificate of Non-Registration of Corporation/Partnership dated May 18, 2007 issued by the Securities and Exchange Commission to Mitsubishi Shoji ; that, on the other hand, Enkei Philippines is a corporation organized and existing under the laws of the Philippines, with address at 104 Industry Drive Carmelray Industrial Park Canlubang, Calamba City Laguna, Philippines; and that Enkei Philippines is registered with the Board of Investments under Certificate of Registration No. EP 95-119 dated July 14, 1995. It is further represented that Mitsubishi Shoji supplies raw materials (particularly, ingots) to Enkei Philippines on credit terms; that based on Mitsubishi Shoji's invoice to Enkei Philippines dated December 6, 2006 under Invoice No. 2000078DEC1, Mitsubishi Shoji sold 187.1780 metric tons of primary aluminum ingot foundry alloy (AA601.7 7KG Ingot) to Enkei Philippines on credit terms, amounting to US$554,726.34 at US$2,963.63 per metric ton; that Enkei Philippines will pay Mitsubishi Shoji on June 4, 2007, or 180 days after the date of the Bill of Lading of such raw materials on December 6, 2006, and such payment will bear interest at the rate 6.30% per annum or amounting to US$17,473.88; and that Enkei Philippines will remit the payment through telegraphic transfer to Mitsubishi Shoji's bank account at the Bank of Tokyo-Mitsubishi UFJ, Ltd. Head Office under Account No. 0734466. RULING In reply, please be informed that interest to be paid by Enkei Philippines to Mitsubishi Shoji on the sale of primary aluminum ingot foundry alloy on credit terms covered by the subject invoice dated December 6, 2006 is subject to preferential tax treatment under the applicable paragraph of Article 11 of the Philippines-Japan tax treaty, which provides: STECAc "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: 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 incentives 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. 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; DCISAE 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." Under paragraphs 2 and 3, interest arising in the Philippines and derived by a resident of Japan is subject to income tax at the rate of (a) 10% if the interest is paid in respect of Government securities, or bonds or debentures, or if the interest is paid by a company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, or (b) 15% in all other cases. Furthermore, under paragraph 4, such interest is exempt from income tax if it is derived by (a) the Government of Japan, the political subdivisions and local authorities of Japan, the Central Bank of Japan, or any financial institution wholly owned by the Government of Japan, or (b) any other resident of Japan with respect to debt-claims guaranteed or indirectly financed by those entities mentioned in Item (a). Accordingly, the interest to be paid by Enkei Philippines to Mitsubishi Shoji on the sale of primary aluminum ingot foundry alloy on credit terms (specifically under Invoice No. 2000078DEC1 dated December 6, 2006) amounting to US$17,473.88 is subject to income tax at the rate of 15% of the gross amount thereof pursuant to paragraph 2 (b), Article 11 of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 35-04 dated April 20, 2004.) While paragraph 2 (b), Article 11 of the Philippines-Japan tax treaty provides for an lower rate of income tax of 10% if the interest is paid by a company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, we note, however, that Enkei Philippines' registration with the Board of Investments (under Certificate of Registration No. EP 95-119 dated July 14, 1995) does not specify therein if Enkei Philippines is also engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. For this reason, the 10% income tax rate cannot apply to such interest to be paid by Enkei Philippines to Mitsubishi Shoji . 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. SEHDIC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Signed on February 13, 1980, and became effective on January 1, 1981.