ITAD BIR Ruling No. 008-11

January 19, 2011 ITAD BIR RULING NO. 008-11 Article 11, Philippines-Korea tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD 164-05; BIR Ruling No. ITAD 12-09 CJ Toyota Tsusho Philippines, Inc. Brgy. Darong, Municipality of Sta. Cruz, Davao del Sur Attention: Yang Chan Kyoo Senior Finance Manager Gentlemen : This refers to the application for tax treaty relief filed on September 29, 2010 requesting in effect, for confirmation that the interest derived by THE EXPORT-IMPORT BANK OF KOREA ("KEXIM") from the loan it extended to CJ TOYOTA TSUSHO PHILIPPINES, INC. ("CJ Toyota") is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . HDITCS Basic Facts It is represented that KEXIM is a nonresident foreign corporation, organized and existing under the laws of Korea with office address at 16-1, Yeouido-Dong, Yeongdeungpo-Gu, Seoul, Korea per Certification of Residence issued by the Director of Yeongdeungpo District Tax Office; that KEXIM is primarily engaged in the business of providing finance required for the overseas economic cooperation, such as export and import, overseas investment and exploitation of overseas resources as such; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission-Davao Extension Office dated September 9, 2010; and that on the other hand, CJ Toyota is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at Brgy. Darong, Municipality of Sta. Cruz, Davao del Sur. It is further represented that KEXIM and CJ Toyota entered into a Loan Agreement ("Agreement") on April 30, 2010 wherein the KEXIM extended a Ten Million U.S. Dollar loan in favor of CJ Toyota under the following terms: a.) Purpose. The proceeds of the Facility 1 shall be used exclusively for financing facility fund requirements of CJ Toyota ; b.) Disbursement. Within five (5) banking days 2 after receipt by KEXIM of the Request for Disbursement, 3 KEXIM shall disburse the requested amount to CJ Toyota's account designated in the Request for Disbursement. c.) Interest. CJ Toyota shall on each Interest Payment Date, 4 pay interest on the Loan for each Interest Period 5 at the rate per annum equal to the sum of the Margin 6 and LIBOR. 7 Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period, and shall be computed on the basis of the actual number of days elapsed and a year of 360 days. d.) Default Interest. In case CJ Toyota fails to pay any amount payable under the Agreement when due, CJ Toyota shall pay to KEXIM default interest on such overdue amount at the rate per annum equal to the sum of (i.) Two Percent (2%), (ii.) the Margin and (iii.) LIBOR. Default Interest shall accrue from and including such due date to but excluding the date of actual payment thereof, and shall be computed on the basis of the actual number of days elapsed and a year of 360 days. e.) Repayment. CJ Toyota shall repay the Loan to KEXIM in six (6) equal (or as nearly equal as possible) consecutive semiannual installments, provided that the last installment shall be in the amount necessary to repay in full the Loan then outstanding. Each such installment shall be due and payable on the following Repayment Date: Date of Repayment Expected Amount of Repayment 2012-10 USD1,666,700 2013-4 USD1,666,700 2013-10 USD1,666,700 2014-4 USD1,666,700 2014-10 USD1,666,600 2015-4 USD1,666,600 that based on the Certification dated August 5, 2010 issued by The Hongkong and Shanghai Banking Corporation Limited ("HSBC"), HSBC has received an inward remittance by means of telegraphic transfer of the following amounts, which were credited to the account of CJ Toyota: Date of Remitter Amount Credited Remittance 4 May 2010 KEXIM USD5,000,000 2 June 2010 KEXIM USD5,000,000 It is finally represented based on the notarized Certification dated September 28, 2010 by the Senior Finance Manager of CJ Toyota, Mr. Yang Chan Kyoo, that the interest subject of the application for tax treaty relief is not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. EDATSI Ruling In reply, please be informed that income from interest on foreign loans received by a nonresident foreign corporation are generally governed by Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended by Republic Act No. 9337. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (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, 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. acHTIC xxx xxx xxx" In relation thereto, Article 11 of the Philippines-Korea tax treaty provides as follows, to wit: "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 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 public issues of bonds, debentures or similar obligation; and b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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 paragraph 2 hereof, 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: i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: DAETcC aa) in the case of the Philippines, the Central Bank of the Philippines, bb) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank and cc) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Contracting States. 5. 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 laws of the State in which the income arises, including interest on deferred payment sales. xxx xxx xxx" Under paragraph 4, Article 11 of the Philippines-Korea tax treaty, interest arising in the Philippines and paid to a resident of Korea shall be taxable only in Korea if the interest is paid in respect of a bond, debenture or other similar obligation of the government of Korea or a political subdivision or local authority thereof, or when the same is paid on a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (1) in the case of the Philippines, the Central Bank of the Philippines, (2) in the case of Korea, the KEXIM, the Export-Import KEXIM, the Korea Exchange Bank and (3) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Philippines and Korea. Accordingly, since the lender of the subject loan is KEXIM, this Office is of the opinion that the interest arising from the subject loan is exempt from Philippine income tax pursuant to the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 164-05 dated December 22, 2005; BIR Ruling No. ITAD 12-09 dated April 3, 2009) However, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of Tax Code of 1997, as amended. HITEaS 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. Facility means the loan facility to be made available in favor of the Borrower under the Loan Agreement or the amount of such loan facility, as the context may require. 2. Banking Day means a day on which banks are open for business in Seoul, New York and Manila. 3. Request for Disbursement means a written request of CJ Toyota to disburse the Facility. 4. Interest Payment Date means the last day of each Interest Period. 5. Interest Period shall be for a period of three (3) months, provided that: (a) The first Interest Period in relation to each Disbursement shall commence on the date on which such Disbursement is made; (b) In relation to each Disbursement after the initial Disbursement, the First Interest Period shall end on the last day of the then current Interest Period in respect of the initial Disbursement; (c) Each Interest Period which would otherwise end on a non-Banking Day shall instead end on the next following Banking Day; but if that Banking Day is in another calendar month, on the immediately preceding Banking Day; and, (d) If any Interest Period commences on the last Banking Day of a calendar month or on a day for which there is no numerically corresponding day in the calendar month three (3) months thereafter, that Interest Period shall, subject to paragraphs (b) and (f), end on the last Banking Day of such later calendar month; and (e) Any Interest Period which would otherwise extend beyond a Repayment Date shall instead end on such Repayment Date (Repayment Date means each of the Six (6) consecutive dates occurring semi-annually from and including the date which shall be Thirty (3) * months from the date of the first Disbursement of the Loan). 6. Margin means Two point Five Four percent (2.54%) per annum. 7. LIBOR means the Three (3) months London Interbank Offered Rate as displayed by the KEXIM at the beginning date of the relevant Interest Periods.