ITAD BIR Ruling No. 003-13

January 15, 2013 ITAD BIR RULING NO. 003-13 Article 10 (2) (a), Philippines-Thailand tax treaty; BIR Ruling No. ITAD-115-11; BIR Ruling No. ITAD-032-10 Mariwasa Siam Ceramic, Inc. Bo. San Antonio, Sto. Tomas Batangas Attention: Ms. Emilie B. Maramag Vice-President-Finance & Admin. Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 9, 2011, on behalf of Siam Cement Public Company Limited ("SCPCL") , requesting confirmation that the interest paid by Mariwasa Siam Ceramics, Inc. ("MSCI") to SCPCL is subject to 15 percent final withholding tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty") . It is represented that SCPCL, with principal office at 1 Siam Cement Road, Bangsue, Bangkok 10800, Thailand, is a resident of Thailand within the meaning of the Philippines-Thailand tax treaty based on the Certificate of Residence issued by the Director of the Bureau of Large Business Tax Administration of the Revenue Department of Thailand on October 10, 2011; and that Mariwasa , on the other hand, is a corporation duly organized and existing under the laws of the Philippines, with office address located at San Antonio, Sto. Tomas, Batangas. It is further represented that on July 27, 2007, SCPCL and MSCI entered into a Sponsor Loan Restructuring Agreement ("Agreement") whereby pursuant to the terms of the Omnibus Agreement, the parties agreed to the structuring of the facility agreement between the Standard Chartered Bank ("SCB") and SCPCL and MSCI ("Borrowers") dated October 20, 2003 and a portion of the loan from International Finance Corporation ("IFC") ; that the Borrower shall, jointly and severally, pay the Restructured Loan 1 in accordance with the repayment terms and Interest Rate; 2 that the Restructured Loan shall be repaid over a period of thirteen (13) years in accordance with the Loan Repayment Schedule beginning March 1, 2008 until March 15, 2020. TSDHCc It is finally represented that the issues or transactions subject of the above request for ruling are not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved per the Certificate issued by MSCI dated September 6, 2011. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest income earned by nonresident foreign corporation. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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;" However, Section 32 (B) (5) of the NIRC of 1997, as amended, provides, viz. : "SEC. 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: cHaICD 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." Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010, published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO. "(Emphasis supplied) In view of the foregoing, this Office hereby DENIES relief on the interest paid by MSCS to SCPCL on or before September 9, 2011 . Accordingly, said interest income shall be subject to income tax at the rate of 20 percent as provided under Section 28 (B) (1) of the Tax Code, as amended. On the other hand, all interest payments made by MSCS to SCPCL after September 9, 2011 are hereby GRANTED relief and subject to income tax at a reduced rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 12 of the Philippines-Thailand tax treaty, as amended. It provides, viz. : aEHIDT "Article 12 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 recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount of interest if: (i) it arises in Thailand and is received by Philippine financial institutions (including insurance companies) (ii) it arises in the Philippines in respect of public issues of bonds, debentures or similar obligations; b) 15 per cent of the gross amount of interest if it arises in the Philippines, and c) 25 per cent of the gross amount of interest if it arises in Thailand. 3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. cEDIAa xxx xxx xxx" Moreover, the Loan Agreement entered into between SCPCL and MSCI is subject to documentary stamp tax imposed under Section 179 of the Tax 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Restructured Loan" shall mean the aggregate principal amount of Philippine Pesos: Two Hundred Twenty Million Two Hundred Thirty-Nine Thousand Fifty-Eight and 91-100 (PhP221,239,058.91). * 2. "Interest Rate" shall mean, for any Interest Period, the rate at which interest is payable on the Restructured Loan on the Interest Payment Date during that Interest Period at the rate of five percent (5%) per annum.