ITAD BIR Ruling No. 008-16

March 4, 2016 ITAD BIR RULING NO. 008-16 Article 11, Philippines-Japan tax treaty Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Eleanor L. Roque Head, Tax Advisory and Compliance Gentlemen : This refers to your tax treaty relief application filed on September 22, 2011 requesting confirmation that interest paid by Taganito HPAL Nickel Corporation ("Taganito") to the Japan Bank for International Cooperation ("JBIC") is exempt from income tax pursuant to 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 ("Philippines-Japan tax treaty") , as amended. 1 Facts Based on the letter of the Ministry of Finance of Japan to the Bureau of Internal Revenue on June 17, 2008, JBIC is a financial institution wholly owned by the Japanese government. It is located at 4-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo, Japan. JBIC is established on October 1, 1999 by merger of the Export-Import Bank of Japan ("JEXIM") and the Overseas Economic Cooperation Fund ("OECF") , both financial institutions and likewise wholly owned by the Japanese government. Originally, JEXIM was engaged in international finance operations by providing loans to the private sector, and OECF in overseas economic cooperation operations by providing loans to foreign governments in pursuance of Japan's economic cooperation activities with these governments. Following the merger, JBIC has taken over and carried out those operations. Following Japan's recent administrative reforms and realignment of all Japanese wholly-owned financial institutions, beginning October 1, 2008, the JBIC's international finance operations will be taken over and carried out by the Japan Finance Corporation , and its overseas economic cooperation operations by the Japan International Cooperation Agency ("JICA") . JBIC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 26, 2011. On the other hand, Taganito is a domestic corporation located at 24th Floor, Pacific Star Building, Makati Avenue corner Sen. Gil Puyat Avenue, Makati City Philippines. SDHTEC On July 5, 2011, Taganito and JBIC entered into a Loan Agreement where JBIC granted Taganito a loan facility not to exceed US$750,166,000 to finance the establishment of Taganito 's production facility for nickel and cobalt mixed sulfide. The facility is located in Taganito, Claver, Surigao del Norte, Philippines. It has a production capacity of 30,000 tons of nickel and 2,600 tons of cobalt per year with initial production to commence in 2013. JBIC will provide loan on the intended date of disbursement and in eligible currency set by Taganito . The loan bears a floating interest rate plus a margin of 0.584 percent per annum. Based on the Certificates of Inward Remittance issued by Metropolitan Bank and Trust Company 2 on January 24, 2013, JBIC to date has disbursed the following amounts to Taganito as loan: Date of Remittance Amount August 4, 2011 US$160,000,000 September 27, 2011 40,000,000 March 27, 2012 270,000,000 April 24, 2012 30,000,000 March 25, 2012 30,000,000 June 26, 2012 20,000,000 July 25, 2012 50,000,000 September 26, 2012 20,000,000 October 26, 2012 20,000,000 November 26, 2012 20,000,000 December 17, 2012 20,000,000 Total US$680,000,000 ============= Based on the Certification issued by Taganito on September 23, 2013 and the Statement of Accounts issued by Sumitomo Mitsui Banking Corporation Singapore Branch, 3 Taganito to date had remitted interest to JBIC: Date of Remittance Amount September 26, 2011 US$240,620.00 March 26, 2012 1,132,724.84 September 25, 2012 3,638,054.38 March 25, 2013 4,155,858.31 Total US$9,167,257.53 ============= Ruling In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended, interest on foreign loan paid to a foreign corporation not engaged in trade or business is subject to income tax at the rate of 20 percent, 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, . . .: 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, under Section 32 (B) (5) of the Tax Code, the interest is exempt or partially exempt to the extent required by any treaty obligation on the Philippines, 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." AScHCD In this connection, paragraph 3, Article 11 of the amended Philippines-Japan tax treaty provides: "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." Under this article, interest arising in the Philippines and paid to the Japanese government, any political subdivision or local authority of Japan, the central bank of Japan, or any financial institution wholly owned by the Japanese government is exempt from income tax in the Philippines. A financial institution in this case includes the Japan Bank for International Cooperation or JBIC. Accordingly, since interest arising from the subject Loan Agreement is derived by JBIC, such interest paid to it by Taganito is exempt from income tax in the Philippines pursuant to paragraph 3, Article 11 of the amended Philippines-Japan tax treaty. However, under Section 179 of the Tax Code, any notice of drawdown or disbursement executed by Taganito and approved by JBIC pursuant to the said agreement is subject to documentary stamp tax ("DST") of P1.00 for every P200.00 (or a fraction thereof) of the amount of the drawdown or disbursement, to wit: "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 fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan." Furthermore, on account that JBIC is a wholly owned Japanese financial institution which normally claim tax exemption in its dealings with foreign governments and private companies, the liability of DST imposed on the above transactions could be shifted eventually to Taganito , as provided under Section 173 of the Tax Code, to wit: AcICHD SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax . (Underscoring supplied) 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. By the 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 . 2. Located at Metrobank Plaza, Sen. Gil Puyat Avenue, Makati, Philippines. 3. Located at 3 Temasek Avenue, 06-01 Centennial tower, Singapore.