ITAD BIR Ruling No. 010-10

June 8, 2010 ITAD BIR RULING NO. 010-10 Article 11, Philippines-Singapore Tax Treaty; Section 28, Tax Code of 1997 ABC Asia-Pacific Business Legal Consulting 2nd Floor Bldg., B. Mactan Marina Mall Mactan Economic Zone 1, Pusok Lapulapu City, Cebu Attention: Atty. Emery Joy A. Tiu Partner Gentlemen : This refers to your letter dated June 24, 2008, filed on behalf of Tsuneishi Heavy Industries (Cebu), Inc . (hereinafter referred to as "Tsuneishi" ), requesting confirmation that the interest payments made by Tsuneishi to Mitsubishi UFJ Lease (Singapore) Pte. Ltd. (hereinafter referred to as "Mitsubishi" ) are subject to the 15% preferential tax rate, pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as "Philippines-Singapore tax treaty" ). cTESIa It is represented that Mitsubishi is a nonresident foreign corporation organized and existing under the laws of the Singapore and is a resident of Singapore for income tax purposes as evidenced by a Certificate of Residence issued by the Assistant Commissioner for the Corporate Tax Division of the Inland Revenue Authority of Singapore, with principal office address at 80 Raffles Pl, #30-21, Singapore 048624; that Mitsubishi is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on May 15, 2008; that, on the other hand, Tsuneishi is a corporation duly organized and existing under the laws of the Philippines with principal address located at West Cebu Industrial Park-Special Economic Zone, Buanoy, Balamban, Cebu; that Tsuneishi is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 98-055 as a new Economic Export Enterprise; and that Tsuneishi is engaged in the business of shipbuilding, ship repair for export, and the importation of raw materials, machinery, equipment, tools, goods, wares, articles, or merchandise directly used in its registered operations at the West Cebu Industrial Park-Special Economic Zone. It is further represented that Tsuneishi intended to acquire three (3) units of Tower type Jib Cranes, and Mitsubishi, agreed to assist Tsuneishi in financing the acquisition of said property; that Mitsubishi and Tsuneishi entered into a Loan Agreement (Agreement) on January 14, 2008 whereby Mitsubishi made available to Tsuneishi a Loan Facility in the amount of Two Billion Japanese Yen (2,000,000,000.00) at the interest rate of 2.7% per annum (fixed rate); that on January 21, 2008, Tsuneishi received the remittance from Mitsubishi as evidenced by a Certification dated April 28, 2008 issued by the Bank Officer; that the term of the loan shall be 60 months, payable in 20 quarterly installments; and that in an affidavit issued by Mr. Shinji Watadani, President of Tsuneishi dated May 26, 2008, the subject transaction is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest income. It provides: TaDSHC "Section 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 interest, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the same Code 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 Article 11 of the Philippines-Singapore tax treaty, which provides as follows: "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 be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 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." IEHScT xxx xxx xxx" Based on the foregoing, interest income which arises in the Philippines and paid to a resident of Singapore will be taxed at a preferential tax rate not exceeding fifteen percent (15%) of the gross amount of interest if the recipient of such interest is also the beneficial owner thereof. Such being the case, since Mitsubishi is a resident of Singapore and is the beneficial owner of the interest income on the subject loan between Mitsubishi and Tsuneishi , said interest income is subject to a preferential tax rate of 15% pursuant to the Philippines-Singapore tax treaty. Moreover, the said Agreement is subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997 provides as follows: SEC. 179. Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments . On each bank check, draft, or certificate of deposit not drawing interest, or order for the payment of any sum of money drawn upon or issued by any bank, trust company, or any person or persons, companies or corporations, at sight or on demand, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50). 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.) JOEL L. TAN-TORRES Commissioner of Internal Revenue