ITAD BIR Ruling No. 031-12

February 8, 2012 ITAD BIR RULING NO. 031-12 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-10; BIR Ruling No. ITAD 22-10; BIR Ruling No. ITAD 20-10 Platon Martinez Flores San Pedro & Leao Law Offices 6th Floor, Tuscan Building 114 V.A. Rufino Street Legaspi Village, 1229 Makati City Attention: Carlos G. Platon Anthony Brett M. Abenir Gentlemen : This refers to your letter dated December 6, 2008, filed on behalf of your client, Philippine Mining Service Corporation ("Philippine Mining"), requesting confirmation that interest paid by Philippine Mining to JFE Mineral Company, Ltd. ("JFE Mineral") is subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty"), as amended by a Protocol 1 effective January 1, 2009. It is represented that JFE Mineral is a corporation organized and existing under the laws of Japan as evidenced by its Articles of Incorporation, as amended; that JFE Mineral is situated at 5th Floor, Shiba-Koen First Building, 8-2 Shiba 3-Chome, Minato-ku, Tokyo, Japan; that JFE Mineral is engaged in the business of mining, processing and sale of iron ore and other minerals; manufacture, processing and sale of materials generated in relation to the steel industry and secondary materials for steel-making; manufacture, processing and sale of ceramics and related products; mining, processing and sale of earth and stones, among others; that JFEM Mineral is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on November 11, 2008; that, on the other hand, Philippine Mining is a domestic corporation situated at 8th Floor, Room 805, Keppel Center, Samar Loop corner Cardinal Rosales Avenue, Cebu Business Park, Cebu City, Cebu, Philippines; that Philippine Mining is registered with the Board of Investments under Certificate of Registration No. EP 95-385 issued on February 2, 1995; and that Philippine Mining is engaged in the business of entering into a service contract with Dolomite Mining Corporation in accordance with law for financial, technical, management and other forms of assistance relative to the exploration, development, exploitation or utilization of the dolomite mining claims of said corporation in the Province of Cebu, including the marketing of such dolomite and its products, among others. CHEDAc It is further represented that on October 30, 2007, Philippine Mining and JFE Mineral entered into a Loan Agreement where JFE Mineral granted a loan to Philippine Mining amounting to US$592,000.00 to finance the construction of the latter's loading facilities for upgrading at its Bohol mine; that Philippine Mining shall repay the loan in accordance with the following schedule: Due Date Principal Amount (In US dollars) June 30, 2009 99,000 December 31, 2009 99,000 June 30, 2010 99,000 December 31, 2010 99,000 June 30, 2011 99,000 December 31, 2011 97,000 That the loan bears interest at a floating rate based on the London Interbank offered rate ("LIBOR") for six months as announced by the British Bankers Association ("BBA") plus a margin of 0.5 percent per annum; that the interest will be paid on June 30 and December 31 of each calendar year; that any unpaid principal, interest, and other payments on their due dates will bear interest at the rate of 2 percent per annum; that the loan will be remitted by telegraphic or electronic transfer to a designated bank account of Philippine Mining on November 5, 2007. It is further represented that on February 2, 2008, Philippine Mining and JFE Mining entered into another Loan Agreement where JFE Mineral granted another loan to Philippine Mining amounting to US$1,722,000.00 to continue to finance the construction of the latter's loading facilities for upgrading at its Bohol mine; that Philippine Mining shall repay the loan in accordance with the following schedule: Due Date Principal Amount (In US dollars) June 30, 2009 287,000 December 31, 2009 287,000 June 30, 2010 287,000 December 31, 2010 287,000 June 30, 2011 287,000 December 31, 2011 287,000 That the loan bears interest at a floating rate based on LIBOR for six months as announced by the BBA plus a margin of 0.5 percent per annum; that the interest will be paid on June 30 and December 31 of each calendar year; that any unpaid principal, interest, and other payments on their due dates will bear interest at the rate of 2 percent per annum; that the loan will be remitted by telegraphic or electronic transfer to a designated bank account of Philippine Mining on March 3, 2008. IaECcH It is further represented that Philippine Mining received an inward remittance from JFE Mining on November 5, 2007 amounting to US$592,000.00, and on March 3, 2008 amounting to US$1,722,000.00 based on the Certification issued by the Business Manager of the branch office of Rizal Commercial Banking Corporation at Fuente Osmea Center, Cebu City, Cebu, Philippines, on September 18, 2008. It is finally represented that 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 the Certification issued by the Vice President and Treasurer of Philippine Mining. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") as amended, provides that interest received by JFE Mineral is subject to income tax at the rate of 20 percent, thus: "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 . (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, Section 32 (B) (5) of the Code provides that such interest may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: HaECDI 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" For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide: "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 the Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx 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. . ." aTEADI xxx xxx xxx" The Protocol amended the foregoing paragraphs and now read: "Article IV "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. 3. Notwithstanding the provisions of paragraph 2, 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, insured 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. . ." Under paragraphs 2, 3 and 4 of Article 11, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) before January 1, 2009, 10 percent if the interest is paid in respect of government securities, bonds or debentures, or if the interest is paid by a domestic company registered with the Board of Investments ("BOI") and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and 15 percent in all other cases; and (b) beginning January 1, 2009, 10 percent in all cases. Furthermore, such interest is exempt if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, or by any resident of Japan under certain conditions. Accordingly, since the interest is not derived by the Government of Japan, and other qualified entities, such interest paid by Philippine Mining to JFE Mineral beginning January 1, 2009, is subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD 32-10 dated August 27, 2010; BIR Ruling No. ITAD 22-10 dated August 25, 2010; and BIR Ruling No. ITAD 20-10 dated August 20, 2010) Finally, Section 179 of the Tax Code, as amended, provides that the International Loan Contracts, being debt instruments, are subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loans subject of these instruments, thus: "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 fractional part thereof, of the issue price of any such debt instrument: Provided, That, for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." CScaDH 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. Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.