ITAD BIR Ruling No. 022-14

February 25, 2014 ITAD BIR RULING NO. 022-14 Article 11, Philippines-Korea Tax Treaty Kepco SPC Power Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Stella A. Medina Legal Officer Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA'') filed on November 21, 2011 on behalf of Export-Import Bank of Korea ("KEXIM") , requesting confirmation that the interest on the loan extended by KEXIM to Kepco SPC Power Corporation ("KEPCO") is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). It is represented that KEXIM, with office address at 16-1, Yeouido-Dong, Yeongdeungpo-Gu, Seoul, Korea, is a nonresident foreign corporation organized and existing under the laws of Korea per Certification of Business Registration issued by the Head of Yeongdeungpo District Tax Office of the National Tax Service; that per Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission (SEC) on September 22, 2011, KEXIM is not registered as corporation or as a partnership in the Philippines; that on August 3, 2011, KEXIM was issued by the SEC a license to establish its representative office in the Philippines under the name of Korea Eximbank Manila Representative Office under company registration no. FS201113299 to promote and provide information about the financial services or products of KEXIM; and that, on the other hand, KEPCO is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City. It is further represented that on March 4, 2010, a Facility Agreement ("Agreement") was entered into with KEPCO, as borrower, and KEXIM, as one of the Facility Lenders wherein KEXIM extended a US$100,000,000 (Facility A Loan) to KEPCO to finance a coal-fired power generating facility to be built in the Municipality of Naga, Cebu; that the loan shall bear interest during each Interest Period 1 at a rate per annum equal to Applicable Rate; 2 that all payments to be made by KEPCO must be made to the KEXIM Facility Agent at JP Morgan Chase Bank, New York for the account name of Sumitomo Mitsui Banking Corporation, Singapore Branch; that the Sumitomo Mitsui Banking Corporation confirmed receipt of the drawdown proceeds from KEXIM whereby the amounts of US$71,000,000.00 and US$1,000,000.00 were credited to KEPCO Dollar Disbursement Account maintained in SMBC Singapore Branch on March 10, 2010 and April 27, 2010, respectively; that KEPCO remitted the following payments for repayments, interest and commitment fees to KEXIM with details, as follows: DCaSHI Value Time Amount Remitted Payee's Name May 27, 2010 US$910,914.69 Sumitomo Mitsui Banking Corporation Singapore Branch Nov. 30, 2010 US$2,592,662.50 Sumitomo Mitsui Banking Corporation Singapore Branch May 31, 2011 US$2,502,222.41 Sumitomo Mitsui Banking Corporation Singapore Branch Nov. 29, 2011 US$9,802,026.15 Sumitomo Mitsui Banking Corporation Singapore Branch May 29, 2012 US$13,146,813.59 Sumitomo Mitsui Banking Corporation Singapore Branch Nov. 29, 2012 US$12,938,468.67 Sumitomo Mitsui Banking Corporation Singapore Branch It is furthermore represented that KEXIM is not and have never been a shareholder of KEPCO per sworn certification issued by the Corporate Secretary of KEPCO; that KEXIM Rep Office is not a material factor in the realization of the interest income derived for the Agreement between KEPCO and KEXIM and neither did it benefit from such income nor have used the same for the conduct of its trade and business in the Philippines per sworn certification issued by the Deputy Director of KEXIM Rep Office dated February 1, 2012. It is finally represented based on KEPCO's Sworn Statement dated August 31, 2011, that the interest subject of the application for tax treaty relief is not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that interest income on foreign loans received by a nonresident foreign corporation are generally governed by Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (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; ACDIcS xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code 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 relation thereto, Article 11 of the Philippines-Korea tax treaty which you invoked may apply to the instant case. It provides: "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 also be taxed in the Contracting State in which it arises, and according to the laws of that 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 public issues of bonds, debentures or similar obligation; and b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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 paragraph 2 hereof, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if the interest is paid in respect of: i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or cSHIaA ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: aa) in the case of the Philippines, the Central Bank of the Philippines; bb) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank; and cc) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the 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, as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises, including interest on deferred payment sales. xxx xxx xxx" Under paragraph 4, Article 11 of the Philippines-Korea tax treaty, interest arising in the Philippines and paid to a resident of Korea shall be taxable only in Korea if the interest is paid in respect of a bond, debenture or other similar obligation of the government of Korea or a political subdivision or local authority thereof, or when the same is paid on a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (1) in the case of the Philippines, the Central Bank of the Philippines, (2) in the case of Korea, the KEXIM, the Korea Exchange Bank and (3) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Philippines and Korea. Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order No. ("RMO") 72-2010 , published in Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides as follows: " SEC. 14 . When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO . " (Emphasis supplied) In view thereof, since the TTRA was filed on November 21, 2011 , after the date of effectivity of the Agreement which was on March 4, 2010 , this Office hereby DENIES relief on interest payments made on or before filing of the TTRA on November 21, 2011, being in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the interest payment. Accordingly, said payments shall be subject to tax at the rate provided in Section 28 of the aforementioned Tax Code of 1997, as amended. AEIcTD On the other hand, the interest payments by KEPCO to KEXIM on November 22, 2011 and thereafter , since the lender of the subject loan is KEXIM, are EXEMPT from Philippine income tax pursuant to the Philippines-Korea tax treaty. However, the Agreement shall be 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 loan agreement. 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. "Interest Period" has the meaning given in the Common Agreement; provided, however, that in relation to an Overdue Amount, "Interest Period" shall mean each period determined in accordance with Section 7.3. 2. "Applicable Rate" means for any interest Period: (a) in the case of the Facility A, the LIBOR for such Interest Period plus the Facility A Applicable Margin; and (b) in the case of the Facility B, the LIBOR for such Interest Period plus the Facility b Applicable Margin.