ITAD BIR Ruling No. 027-14

April 14, 2014 ITAD BIR RULING NO. 027-14 Article 11, Philippines-Sweden Tax Treaty Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Julie Fe A. Del Rosario Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 20, 2012, on behalf of Transcom Aktiebolag ("Transcom-Sweden") , requesting confirmation that the interest paid to Transcom-Sweden by Transcom Worldwide (Philippines), Inc. ("Transcom-Phil") are subject to 10 percent final withholding tax rate under Article 11 of the amended Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty, as amended"). It is represented that Transcom-Sweden , with address at 691 78 Karlskoga, Sweden, is a corporation organized and existing under the laws of Sweden, and is a resident thereof within the meaning of the Philippines-Sweden tax treaty per the Certificate issued by the Sweden Tax Agency dated February 28, 2012; 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 March 9, 2012; and that, on the other hand, Transcom-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at Transcom Building, Frontera Verde corner E. Rodriguez Avenue, Pasig City. It is further represented that on February 29, 2012, Transcom-Sweden and Transcom-Phil entered into a Term Loan Agreement ("Agreement") , whereby Transcom-Sweden agreed to make available to Transcom-Phil a credit facility (" Facility ") under which a loan or loans up to an aggregate amount of EUR1,000,000 may be advanced, to be used for general corporate purposes of Transcom-Phil , on the terms and conditions set forth in the Agreement; that the Facility is available for utilization until February 28, 2014 with an interest rate per annum equal to the aggregate of one (1) month Inter-Bank Rate and the Margin, payable on the Termination Date, which means the date falling five (5) Business Days after the date on which Lender has given notice to the Borrower that the Loan shall be repaid; and that, based on Affidavit issued by Transcom-Phil , as of November 15, 2013, Transcom-Phil has not made any principal and interest payments to Trancom-Sweden pursuant to the Agreement. IHEAcC 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-Sweden tax treaty, as amended, 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 also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. IcHSCT xxx xxx xxx 4. 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article." Based on the above provisions, interest derived by a corporation which is a resident of Sweden may qualify for a preferential rate of 10 percent of the gross amount thereof under the Philippines-Sweden tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 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 Transcom-Sweden 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 interest to be paid by Transcom-Phil to Transcom-Sweden pursuant to the Agreement, is subject to Philippine income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Sweden tax treaty, as amended. Moreover, the subject Agreement entered into between Transcom-Phil and Transcom-Sweden 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 loan 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