ITAD BIR Ruling No. 012-16

March 4, 2016 ITAD BIR RULING NO. 012-16 Article 10, Philippines-United Kingdom Tax Treaty Terramino Holdings, Inc. 162 Aguirre St., BF Homes, Paraaque City Attention: Alfredo R. Villacorte Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 08 March 2013 requesting confirmation that the interest income earned by Standard Chartered Bank-UK ("Standard-UK") from a Loan Agreement entered into with Terramino Holdings, Inc. ("Terramino-Philippines") is subject to the preferential tax rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty") . Basic Facts The facts, as represented, are as follows: Standard-UK is a non-resident foreign corporation organized and existing under the laws of the United Kingdom with address at 1 Aldermanbury Square, London, EC2V 7SB based on the notarized and consularized Certificate of Residence issued by the HM Revenue & Customs, Large Business Service, Financial Sector of London and is authorized to carry on the business of banker in any part of the world based on the notarized and consularized Royal Charter, By-Laws and Rules of Standard-UK. Standard-UK 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 10 April 2013. On the other hand, Terramino-Philippines is a domestic corporation with address at 162 Aguirre St., BF Homes, Paraaque City. On 20 September 2012, Standard-UK and Terramino-Philippines entered into an Omnibus Agreement ("Loan Agreement") based on a notarized and consularized certified true copy of the Loan Agreement . In that Loan Agreement, it is desired that Terramino-Philippines will obtain financing from Standard-UK through a loan facility in the amount of Two Hundred Seventy Five Million US Dollars (US$275,000,000.00). 1 The loan shall be paid in accordance with the Interest Period 2 agreed upon by the parties. The rate of interest shall be calculated based on the percentage rate per annum which is the aggregate of the applicable margin or LIBOR. 3 On 22 April 2013, Terramino-Philippines received the amount of US$275,000,000.00 from Standard-UK based on the notarized Certification executed by the Trust Officer of Standard-UK . Subsequently, interest payments were made by Terramino-Philippines to Standard-UK as follows, based on a notarized Certification issued by Standard-UK : Principal Interest Period Interest Rate Interest From To USD275,000,000.00 9/21/2012 12/21/2012 3.27575% USD2,277,101.22 USD275,000,000.00 12/21/2012 3/20/2013 3.21000% USD2,182,354.17 On 22 April 2013, Terramino-Philippines made the first outward remittance as follows: Principal Interest Period Interest Rate Interest From To US$275,000,000.00 20-Mar-13 22-Apr-13 3.10320% US$782,265.00 based on a notarized Certification of outward remittance issued by Standard Chartered Bank, Makati branch. The interest subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on a notarized Sworn Statement issued by the Corporate Secretary of Terramino-Philippines on 26 March 2013. ETHIDa Ruling A. On Interest Payments In reply, please be informed that such interest paid to Standard-UK and all foreign corporations not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent. Section 28 (B) (5) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. 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; xxx xxx xxx" However, such interest may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the NIRC 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. xxx xxx xxx" In this case, paragraph 10 of the Philippines-United Kingdom tax treaty provide as follows: "Article 10 Interest 1. Interest arising in a Contracting State which is derived and beneficially owned by 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 law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. 4. Notwithstanding the provisions of paragraphs 2 and 3 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: a) the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term "instrumentality" as used in this paragraph means any agency or entity created or organised by either Contracting Government in order to carry out governmental functions. 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article." Based on the above provisions, interest arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines at (a) a rate not to exceed fifteen percent (15%) of the gross amount of the interest; or (b) 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations; or (c) the interest income shall be exempt from taxation if it is derived and beneficially owned by (1) the Government of the United Kingdom; or (2) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term interest means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Accordingly, since the interest arising from the Loan Agreement is not in respect of government securities, bonds or debentures at hand, and since Terramino-Philippines is not registered with the Board of Investments as such, and since the interest is not paid to the Government of the United Kingdom, etc., such interest to be paid by Terramino-Philippines to Standard-UK in relation to the Loan Agreement is subject to income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) of the Philippines-UK tax treaty. cSEDTC B. On documentary stamp tax Finally, the Loan Agreement, being a debt instrument, executed by Terramino-Philippines in favor of Standard-UK is subject to documentary stamp tax equivalent to P1.00 for every P200.00, or fractional part thereof, of the issue price or the amount subject of the Loan Agreement . Section 179 of the Tax Code, as amended, provides: "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 a fractional part thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ration of its term in number of days to three hundred sixty-five days, provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" 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. See Recitals, par. A and Schedule 1 of the Loan Agreement. 2. Section 9.1 Selection of Interest Periods, Loan Agreement: (a) The Borrower may select an Interest Period for a Loan in the Utilisation Request for that Loan or (if the Loan has already been borrowed) in a Selection Notice. (b) Each Selection Notice for a Loan is irrevocable and must be delivered to the Agent by the Borrower not later than the Specified Time. (c) If the Borrower fails to deliver a Selection Notice to the Agent in accordance with paragraph (b) above, the relevant Interest Period will be one Month. (d) Subject to this Clause 9, the Borrower may select an Interest Period of three Months or such other period as may be agreed between the Borrower and the Agent (acting on the instructions of all the Lenders). (e) An Interest Period for a Loan shall not extend beyond the applicable Termination Date. (f) Each Interest Period for a Loan shall start on the Utilisation Date or (if already made) on the last day of its preceding Interest Period. 3. See Section 8.1 Calculation of Interest of the Loan Agreement.