ITAD BIR Ruling No. 002-16

January 26, 2016 ITAD BIR RULING NO. 002-16 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-014-10; BIR Ruling No. ITAD-020-10 Punongbayan & Araullo 20th Floor Tower 1 6766 Ayala Avenue Makati City Attention: Ms. Eleanor L. Roque Head, Tax Advisory & Compliance Gentlemen : This refers to your application for tax treaty relief dated September 22, 2011 , on behalf of your client, Taganito HPL Nickel Corporation (hereinafter referred to as " Taganito "), requesting confirmation that the interest income payments by Taganito to Sumitomo Metal Mining Co. Ltd. ("Sumitomo") are exempt from income tax based on 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty") . Basic Facts It is represented that Sumitomo is a non-resident foreign corporation organized and existing under the laws of Japan with principal office address at 11-3, Shimbashi 5-chome, Minato-ku, Tokyo, Japan based on the Certification by the Tax Authorities of the Country of Residence of the Income Earner dated August 19, 2011; that Sumitomo has a representative office in the Philippines under the name of Sumitomo Metal Mining Co., Ltd. with SEC Registration No. F000000620 based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on October 10, 2011; that Sumitomo Metal Mining Co., Ltd. has no participation, directly or indirectly, in the subject transaction between Taganito and Sumitomo , and that the interest income derived by Sumitomo from the said transaction is neither attributable to its representative office nor paid or coursed through it based on the Certification issued by the General Manager of Administration Department of Taganito Project Division of Sumitomo; that Taganito , on the other hand, is a domestic corporation with principal business address at the 24th Floor, Pacific Star Building, Makati Avenue corner Gil Puyat Avenue, Makati City. It is further represented that on June 10, 2011, Sumitomo and Taganito entered into a Term Loan Agreement ("Agreement") whereby Sumitomo agrees to make a loan to Taganito upon receipt of a Request for Disbursement in an aggregate principal amount not to exceed Two Hundred Seventy Three Million Three Hundred Thousand US Dollars (US$273,300,000.00) during the Availability Period commencing on the date the Agreement shall have been executed and delivered by Taganito and Sumitomo and expiring on the earliest of (a) May 31, 2012, (b) the date on which the facility of the Agreement is fully disbursed, (c) the date on which the facility of the Agreement is cancelled pursuant to the terms of the Agreement , and (d) such other date as the parties may otherwise agree; that Taganito shall pay Sumitomo the unpaid principal balance of the loan due and payable in accordance with the Amortization Schedule below: TIADCc Installment Number Repayment Date Amount in US$ 1 March 25, 2014 34,162,500.00 2 September 25, 2014 34,162,500.00 3 March 25, 2015 34,162,500.00 4 September 25, 2015 34,162,500.00 5 March 25, 2016 34,162,500.00 6 September 25, 2016 34,162,500.00 7 March 25, 2017 34,162,500.00 8 September 25, 2017 34,162,500.00 Total 273,300,000.00 ============ that Taganito shall pay Sumitomo interest in arrears on the Interest Payment Date; that interest will be payable on the unpaid principal amount of the loan from time to time at a rate of 3.495% per annum, on the basis of 360-day/year; that the interest payment date shall be the date the first loan is made until such principal amount shall be paid in full, payable on each 25th day of March and 25th day of September in each year; that the loan in the Agreement has been insured by Nippon Export and Investment Insurance under an Overseas United Loan Insurance Policy No. 10-11-660008 based on the Certification issued by the Chief Executive Director of the Planning and Administration Department of Nippon Export and Investment Insurance on August 26, 2011. It is finally represented that 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 the Certification issued by the President of Taganito on September 15, 2011. A. On interest payments In reply, please be informed that such interest paid to MGLC, a foreign corporation 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 ("Tax Code") , 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 Tax Code 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 particular case, you invoke the Philippines-Japan tax treaty, as amended by the Protocol. Paragraphs 1 to 4, Article 11 thereof provide as follows: AIDSTE "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 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, 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, insured 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 Japan Bank for International Cooperation and the Nippon Export and Investment Insurance ; b) In the case of the Philippines, the Development Bank of the Philippines and the Land 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." (underscoring ours) 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. Based on the above provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) before January 1, 2009, 10 percent if the interest is paid in respect of government securities, bonds or debentures, or if the interest is paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and 15 percent of the gross amount of the interest in all other cases; and (b) beginning January 1, 2009, 10 percent. Further, such interest is exempt from income tax if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, or by a resident of Japan under certain conditions. 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. AaCTcI Accordingly, since the interest arising from the Agreement insured by Nippon Export and Investment Insurance , a financial institution wholly owned by that Government, such interests to be paid by Taganito to Sumitomo in relation to the Agreement are exempt from income tax. B. On documentary stamp tax However, the Agreement , being a debt instrument, executed by Taganito in favor of Sumitomo , 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 Note. 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. Protocol Amending 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 effective January 1, 2009.