ITAD BIR Ruling No. 020-10

August 20, 2010 ITAD BIR RULING NO. 020-10 Article 11, Philippines-Japan Tax Treaty Arysta LifeScience Philippines Unit 810 ALPAP II Bldg. Trade St., corner Investment Drive Madrigal Business Park Ayala-Alabang, Muntinlupa City 1170 Philippines Attention: Mr. Arnel B. Ponte President Gentlemen : This refers to your letter dated October 16, 2009 requesting confirmation of your opinion that the interest payments made by Arysta LifeScience Philippines (Arysta Philippines) to Arysta LifeScience Corporation (Arysta Japan) , under 2 Loan Agreements dated September 21, 2008 and August 13, 2009, are subject to the 10 percent preferential rate pursuant to the Philippines-Japan tax treaty. TIaCAc It is represented that Arysta Japan is organized and existing under the laws of Japan with principal office at 8-1 Akashi-cho, Chuo-ku, Tokyo, Japan as evidenced by an original copy of its Residence Certificate issued by the District Director of Kyobashi Tax Office dated September 16, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 13, 2009; that Arysta Philippines is a corporation duly organized and existing under the laws of the Philippines with principal office at Unit 810 ALPAP II Bldg. Trade St., corner Investment Drive Madrigal Business Park Ayala-Alabang, Muntinlupa City, Philippines. It is further represented, that Arysta Japan and Arysta Philippines entered into two (2) loan agreements: 1) on September 21, 2008, in which Arysta Japan made available to Arysta Philippines a loan facility, to be used as funds for working capital, in the total amount of One Million US Dollars (US$1,000,000.00), with an interest rate equivalent to 8.5% per annum, which shall become due starting the 20th day of each December, March, June and September of each year until (and including) the Principal Repayment Due date or October 31, 2011; that as proof of inward remittance, Arysta Philippines presented a Certificate of Inward Remittance dated October 16, 2009, from Metrobank Plaza Makati City, showing that it received an inward remittance in the amount of Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Five US Dollars (US$999,995.00) posted on September 24, 2008; and 2) on August 13, 2009, in which Arysta Japan made available to Arysta Philippines a loan facility, to be used as funds for working capital, in the total amount of One Million US Dollars (US$1,000,000.00), with an interest rate equivalent to 6.0% per annum which shall become due starting the 20th day of each December, March, June and September of each year until (and including) the Principal Repayment Due date or August 16, 2012; that as proof of inward remittance, Arysta Philippines presented a Certificate of Inward Remittance, CIR09-080311 dated October 12, 2009, issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch, showing that it received an inward remittance on August 17, 2009 in the amount of One Million US Dollars (US$1,000,000.00); and that the issue/s or transaction subject of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved, per Certification issued by the Corporate Secretary of Arysta Philippines dated August 27, 2009. 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. It provides: "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 Tax Code of 1997, as amended provides: EITcaD "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 accordance with the foregoing, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting 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 Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, 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 Japan, 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 paragraphs 2 and 3, 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 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 Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development Bank of the Philippines; and DAEICc 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. 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. 6. The provisions of paragraphs 1, 2 and 3 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal 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 case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provision, interest income derived in the Philippines by a corporation which is a resident of Japan shall be taxed at a preferential rate of 10 percent if the interest is paid in respect of government securities, or bonds or debentures; 10 percent if the payor company is BOI-registered engaged in preferred pioneer areas of investment; and 15 percent of the gross amount of the interest in all other cases. Considering that Arysta Philippines, the payor of the interest, is not BOI-registered and the interest is not paid in respect of government securities, or bonds or debentures, the subject interest income payments to Arysta Japan from September 21, 2008 to December 31, 2008 may not qualify for the 10 percent treaty rate being applied for. Instead of the 10 percent rate, the said payments merely qualify for a 15 percent preferential tax rate under Article 11 (2) [b] of the Philippines-Japan tax treaty. However, a Protocol amending the existing Philippines-Japan tax treaty took effect on January 1, 2009 whereby the aforementioned 15 percent tax rate in all other cases was reduced to 10 percent. Accordingly, interest income accruing on January 1, 2009 may qualify for the application of a 10 percent preferential tax rate pursuant to the Protocol. Article IV of the said Protocol provides, viz. : "Paragraphs (2), (3), (4), (5), (6), (7) and (8) of Article 11 of the Convention shall be deleted and replaced by the following: (2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. xxx xxx xxx" In view of all of the foregoing, this Office is of the opinion and so holds that the subject interest income payments by Arysta Philippines to Arysta Japan under the Loan Agreements are subject to tax at a rate not exceeding 15 percent based on the gross amount of the interest. However, the interest payments accruing from 01 January 2009 and thereafter shall be subject to tax at a rate not exceeding 10 percent based on the gross amount of the interest, pursuant to the Article 11 of the Philippines-Japan tax treaty, as amended. 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