Ocampo and Suralvo Law Offices

January 30, 2018 ITAD BIR RULING NO. 007-18 Articles 5 (Permanent Establishment) and 22 (Other Income) Philippines-Austria tax treaty Ocampo and Suralvo Law Offices Unit 28B, 28th Floor, Ayala Life-FGU Center 6811 Ayala Avenue 1209 Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on July 27, 2016 requesting confirmation that guarantee fees paid by Alpla Philippines, Inc. (" Alpla Philippines ") to Alpla Holding GmbH (" Alpla ") are exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Austria tax treaty "). ASEcHI FACTS Alpla is a foreign corporation organized and existing under the laws of Austria and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Austrian Tax Administration. The objects of Alpla are to manage assets and perform holding functions, and to participate in other identical or similar companies and to assume their management and representation. Alpla 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 the other hand, Alpla Philippines is a domestic corporation engaged in the development and production of soft and rigid plastic packaging and their molds, including bottles, jars, caps and preforms. Alpla Philippines is a wholly-owned subsidiary of Alpla based on Alpla Philippines ' General Information Sheet as of March 7, 2014 and Audited Financial Statements as of December 31, 2014. Facility Agreement with Deutsche Bank AG Manila On April 6, 2015, Alpla Philippines entered into a Facility Agreement with Deutsche Bank AG Manila (" Deutsche Bank Manila ") where Deutsche Bank Manila granted Alpla Philippines a short-term facility with an aggregate principal not exceeding P360,000,000.00. The facility will be used to finance Alpla Philippines ' working capital requirements and cover its sale and purchase of foreign currencies. Any advance drawn from the facility will be repaid in full on its repayment date. Alpla Philippines may roll-over all or any part of unpaid principal of a short-term loan into a new and outstanding loan. The facilities will be secured by a parental guarantee by Alpla . Term Loan Facilities with ING Bank N.V. Manila Branch On September 22, 2014, Alpla Philippines and Alpla entered into a Term Loan Facilities Agreement with ING Bank N.V. Manila Branch (" ING Bank Manila ") where ING Bank Manila granted Alpla Philippines a long-term facility with an aggregate principal not exceeding $18,000,000.00, or its peso equivalent. The facility will be used to finance Alpla Philippines ' general corporate funding requirements. The loan will be repaid in 25 equal quarterly payments covering 50% of the loan, and one final repayment covering the other 50% of the loan on the maturity date of the loan. As guarantor, Alpla will execute a guarantee in favor of ING Bank Manila with respect to amounts payable by Alpla Philippines to ING Bank Manila under the Agreement. On September 22, 2014, Alpla issued a Letter of Guarantee to ING Bank Manila where Alpla guarantees the payment of Alpla Philippines ' indebtedness to ING Bank Manila corresponding to interests, costs, expenses, fees, currency fluctuations, and other payments to ING Bank Manila under the Agreement. Based on the sworn statements and reply letter issued by Alpla Philippines , to date, Alpla Philippines has obtained loan only from ING Bank Manila and not Deutsche Bank Manila . The annual rate of guarantee payable to Alpla is equivalent to 0.50% of Alpla Philippines ' outstanding loans at the end of the calendar year. On January 9, 2015, Alpla Philippines obtained a long-term loan from ING Bank Manila amounting to P__________. The loan bears interest at three-month LIBOR 1 plus margin between ___% to ___% per annum. In 2015, total interest and principal paid were P__________ and P__________, respectively, at an average interest rate of ____% per annum. In 2016, total interest and principal were P__________ and P__________, respectively, at an average of ______% per annum. The guarantee provides economic benefit to Alpla Philippines in the form of lower interest rates. The average interest rates of ______% and _____% per annum in 2015 and 2016 charged by ING Bank Manila are relatively lower than the average rates quoted by commercial banks in the Philippines for all maturities and published by the Bangko Sentral ng Pilipinas: 2 ____% per annum in 2015 and ____% per annum in 2016. Based on a certification issued by Alpla Philippines , the guarantee fees subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. ITAaHc RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business is subject to income tax rate of 30%, to wit: " 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, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation on the Philippine government, to wit: " 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: 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." For this purpose, Article 22 of the Philippines-Austria tax treaty provides: " Article 22 OTHER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. Under Article 22, items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing articles of the tax treaty shall be taxable only in that State. However, the income is taxable in the other Contracting State if it is effectively connected with a permanent establishment (if the recipient is an enterprise) or a fixed base (if the recipient is an individual) situated in the other State. On the nature of guarantee fees , based on its Articles of Association, Alpla 's objects are to manage assets and perform holding functions, and to participate in other identical or similar companies and to assume their management and representation. Those objects do not expressly include the provision of guarantee; hence, income from guarantee cannot be considered as business profits or profits of an enterprise under Article 7 of the tax treaty insofar as Alpla is concerned. Moreover, guarantee fees are not compatible with the other specific articles of the treaty income from real property (Article 6); profits from the operation of ships or aircraft in international traffic (Article 8); dividends (Article 10); interest (Article 11); royalties (Article 12); and capital gains (Article 13). The property or activity that gives to these incomes is not in any manner connected with providing guarantee. On permanent establishment , paragraphs 1 and 2, Article 5 of the tax treaty defines this concept below: " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a warehouse, in relation to a person providing storage facilities for others; and h) premises used for the purpose of selling goods or merchandise." Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes, especially, a place of management, a branch, an office, a factory, a workshop, and other fixed places of business. Accordingly, since Alpla is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or other fixed place of business in the Philippines, Alpla is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Austria tax treaty. Moreover, since the guarantee fees paid by Alpla Philippines to Alpla are not effectively connected with a permanent establishment, and the fees are not dealt with any specific articles of the tax treaty ( e.g. , income from real property, business profits, income from the operation of ships or aircraft in international traffic), such fees paid in connection with guaranteed loans obtained by Alpla Philippines from ING Bank Manila and Deutsche Bank Manila are within the scope of Article 22 of the Philippines-Austria tax treaty and therefore exempt from income tax pursuant to that article. CHTAIc 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. LIBOR means London Interbank offered rate, which is the average daily rate set by large banks in the United Kingdom where these banks can borrow from each other for reasonable amount of US dollars. The rates are for fifteen borrowing terms that range from overnight to one year (365 days). http://www.imf.org/external/pubs/ft/fandd/2012/12/basics.htm 2. http://www.bsp.gov.ph/statistics/efs_fsal.asp . n Note from the Publisher: Copied verbatim from the official document.