ITAD BIR Ruling No. 001-16

January 8, 2016 ITAD BIR RULING NO. 001-16 Article 11, Philippines-Sweden tax treaty, as amended Drillcorp Philippines, Inc. 16 South Coast Industrial Estates, Bancal Carmona Cavite 4116 Attention: Cheryl Deapera-Alsim Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 15 October 2012, requesting confirmation that the interest income earned by Atlas Copco Customer Finance AB ("Atlas-Sweden") from a Supplier Credit Agreement entered into with DrillCorp Philippines, Inc. ("DrillCorp-Philippines") is subject to the preferential tax rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty") . Basic Facts The facts, as represented, are as follows: Atlas-Sweden is a foreign corporation organized and existing under the laws of Sweden based on a notarized and consularized Residence Certificate issued by the Bolagsverkert Swedish Companies Registration Office on 11 June 2012 and Certificate of Registration issued by the Swedish Tax Agency 09 October 2012. The company Atlas Sweden is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 27 November 2012. DrillCorp-Philippines , on the other hand, is a domestic corporation organized and existing under Philippine laws. 23 February 2012, Atlas-Sweden and Drill Corp-Philippines entered into a Supplier Credit Agreement whereby Atlas-Sweden sold 1x CS14 and Wireline Drill Rod in accordance with the terms 1 under a consularized and notarized Supplier Credit Agreement wherein the amount of credit given to DrillCorp-Philippines is Four Hundred Seventy Six Thousand Five Hundred Seventy Three US Dollars and Seventy Five Cents (US$476,573.75) with interest at the rate of 6.75% per annum. The interest subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on a notarized Certificate of No Pending Case issued by DrillCorp-Philippines . CAIHTE Ruling A. On Interest Payments In reply, please be informed that such interest paid to Atlas-Sweden and all foreign corporations not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent. Section 28 (B) (5) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, provides: "Section 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; xxx xxx xxx" However, such interest may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the NIRC of 1997, as amended, provides: "Section 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. xxx xxx xxx" In this case, Article 11 of the Philippines-Sweden tax treaty provide as follows: "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 also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State, if the interest is paid in respect of: DETACa (a) a bond, debenture or other similar obligation of the government of the first-mentioned Contracting State or a political subdivision or a local authority thereof; or (b) a loan made, refinanced, guaranteed or insured, or a credit extended, refinanced, guaranteed or insured by: (i) in the case of the Philippines, Bangko Sentral ng Pilipinas (BSP); (ii) in the case of Sweden, the Central Bank of Sweden, the Swedish International Development Cooperation Agency (SIDA), the Swedish Export Credit Corporation (SEK), the Swedish Export Credits Guarantee Board (Exportkreditnamndem) or any other institution of a public character with the objective to promote exports or development; (iii) other governmental agencies or lending institutions as may be specified and agreed in an exchange of notes between the competent authorities of the Contracting States. 4. 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal 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 case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. 6. Interest shall be deemed to arise in Contracting State when the payer is that State itself, a political subdivision, a local 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 such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, 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 beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." aDSIHc Based on the above provisions, interest arising in the Philippines and paid to a resident of Sweden may be taxed in the Philippines at a rate not to exceed ten percent (10%) of the gross amount of the interest. The term interest 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. Accordingly, since the interest arising from the Client Supplier Agreement is not in respect of a bond, debenture or other similar obligation of the government of the Philippines nor a loan made, refinanced, guaranteed or insured, or a credit extended, refinanced, guaranteed or insured by the BSP or other government agency, the interest income paid by DrillCorp-Philippines to Atlas-Sweden shall be subject to the preferential rate of 10% of the gross amount of interest pursuant to the Philippines-Sweden tax treaty. B. On documentary stamp tax Finally, the Client Supplier Agreement , being a debt instrument, executed by DrillCorp-Philippines in favor of Atlas-Sweden is subject to documentary stamp tax equivalent to P1.00 for every P200.00, or fractional part thereof, of the issue price or the amount subject of the Client Supplier Agreement . Section 179 of the Tax Code, as amended, 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 a fractional part thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ration of its term in number of days to three hundred sixty-five days, provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Page 1 of the Supplier Credit Agreement.