ITAD BIR Ruling No. 018-16

March 15, 2016 ITAD BIR RULING NO. 018-16 Article 11, Philippines-Singapore tax treaty Fernandez Aguja Law Firm Suite 3A JL Building Don Jose Avila corner Don Gil Garcia Streets Cebu City 6000 Attention: Atty. Joseph Emmanuel F. LiwagCorporate Treasurer This refers to your Tax Treaty Relief Application filed on November 12, 2015, on behalf of KNOWLES ELECTRONICS SINGAPORE PTE. LTD. ("Knowles SG"), requesting confirmation that the interest payment made by KNOWLES ELECTRONICS (PHILIPPINES) CORPORATION ("Knowles PH") to Knowles SG is subject to 15 percent final withholding tax rate under Article 11 of 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 ("Philippines-Singapore tax treaty"). It is represented that Knowles SG is a corporation organized and existing under the laws of Singapore and a resident thereof based on the consularized and notarized Certificate of Residence issued by the Inland Revenue Authority of Singapore on December 5, 2014; that Knowles SG is engaged in the business of research, investigative and experimental work in relation to the development, functions and uses of computers, embedded software systems, communication devices and systems, and investment holdings; that it is not registered either as a corporation or as a partnership in the Philippines per certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 28, 2013; and that, on the other hand, Knowles PH is a corporation organized and existing under the laws of the Philippines; and it is engaged in the business of manufacturing components for hearing aid devices as well as MEMS surface mount microphones for major mobile phone brands and consumer electronic devices. It is further represented that on November 28, 2012, Dover Asia Trading Private Limited ("Dover") and Knowles PH entered into a Credit Facility Agreement ("Agreement") in the amount not exceeding at any time to US$15,000,000.00. The Agreement became effective on November 20, 2012 and remain in effect until November 20, 2013 with provision on automatic renewal with the same terms unless otherwise written by Dover and Knowles PH. The interest is 0.85% per annum calculated on the basis of a year of three hundred and sixty-five days and for the exact number of days elapsed. Subsequently, on September 16, 2013, a Deed of Novation of Advances/Liabilities in Knowles Electronics (Philippines) Corporation ("Novation Agreement") was made among Dover, Knowles SG and Knowles PH , whereby Dover assigned and transferred all the rights and obligations of Dover to Knowles SG under the Agreement. As of September 16, 2013, the total advances of Dover to Knowles PH which will be transferred to Knowles SG amounted to US$11,837,987.78 under the Novation Agreement. cDHAES It is finally represented that the transaction subject of the request for 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 of the taxpayer/s involved per Sworn Statement of Knowles PH dated November 10, 2015. In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It 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;" However, said income may be exempt from income tax or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, 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." Thus, Article 11 of the Philippines-Singapore tax treaty, which you invoke, may apply to the instant case. It states: "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. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on in the other Contracting State in which the interest arises a trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, interest derived by a corporation which is a resident of Singapore may qualify for a preferential rate of 15 percent of the gross amount thereof under the Philippines-Singapore tax treaty, if the recipient of such interest is also the beneficial owner thereof. However, the 15 percent tax rate shall not apply if such corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. In view of the foregoing, and considering that Knowles SG does not have permanent establishment in the Philippines to which the subject interests are effectively connected, this Office is of the opinion and so holds that the interests to be paid by Knowles PH to Knowles SG are subject to Philippine income tax at the preferential rate of 15 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Singapore tax treaty. Moreover, the Novation Agreement among Dover, Knowles PH and Knowles SG is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such agreement. This ruling is issued on the basis of the foregoing 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