Sycip Gorres Velayo and Co.

March 11, 2020 ITAD BIR RULING NO. 033-20 Article 11 Philippines-Japan tax treaty, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA _____________________ Gentlemen : This refers to your application for tax treaty relief filed on behalf of NEC Tokin Electronics (Philippines), Inc. ("NEC Tokin Philippines") on January 11, 2012 requesting confirmation that: a) Interest paid by NEC Tokin Philippines to Sumitomo Trust and Banking Company Ltd. ("Sumitomo Trust Bank") under a Loan Agreement is subject to income tax at the rate of 10% 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") ; 1 and b) The Loan Agreement is not subject to documentary stamp tax because the borrower, NEC Tokin Philippines , is an enterprise registered with the Philippine Economic Zone Authority ("PEZA") , and that the creditor, Sumitomo Trust Bank , is a nonresident foreign corporation which is outside the taxing jurisdiction of the Philippines. FACTS Sumitomo Trust Bank is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation and Certificate of Residence issued by the Higashi Tax Office in Japan. Sumitomo Trust Bank is engaged in the trust business; in accepting deposits and installment savings, extending loans, discounting bills and notes and exchange transactions; in guaranteeing obligations, accepting bills and notes and any other business incidental to the banking business, among others. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, NEC Tokin Philippines is a domestic corporation engaged in manufacturing electro-mechanical devices such as relays. It is also registered with the Philippine Economic Zone Authority ("PEZA") . CAIHTE On September 30, 2011, NEC Tokin Philippines and Sumitomo Trust Bank (through its branch office in Singapore) entered into a Loan Agreement where Sumitomo Trust Bank granted NEC Tokin Philippines a credit facility to not exceed US$ ______________ , to finance its capital expenditures. NEC Tokin Philippines shall draw an advance from the facility of at least US$ ______________ , and in multiples of US$ ______________ . The facility shall become available beginning September 30, 2011 until September 28, 2012. Each advance shall bear interest at the rate equivalent to the cost of funding the advance as determined by Sumitomo Trust Bank for a particular interest period in a particular interbank market, plus a margin of 0.75% per annum. NEC Tokin Philippines shall select the interest period for the advance that is acceptable to Sumitomo Trust Bank . All outstanding advances and interest shall be paid not later than September 30, 2013. Based on a sworn statement issued by NEC Tokin Philippines , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. aScITE RULING A. Income tax In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, interest on foreign loans received by a nonresident foreign corporation is subject to income tax at the rate of 20%, to wit: " SEC. 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." However, under Section 32 (B) (5) of the Tax Code, such income is exempt or partially exempt to the extent required by any treaty obligation on the Philippine government, thus: " SEC. 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." In this connection, paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended, provides relief 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 10 per cent of the gross amount of the interest. Under Article 11, interest arising in the Philippines and paid to a resident of Japan is subject to income tax in the Philippines at a rate not exceeding 10%. Accordingly, since Sumitomo Trust Bank is a resident of Japan, such interest paid by NEC Tokin Philippines to Sumitomo Trust Bank (through its branch office in Singapore) under the Loan Agreement is subject to income tax at the rate of 10% pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. HEITAD B. Documentary stamp tax Furthermore, under Section 179 of the Tax Code, the Loan Agreement, being a debt instrument, is subject to documentary stamp tax ("DST") equivalent to P1.00 for every P200.00 (or a fraction thereof) of the total amount of the loan, to wit: " 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 . . ." Beginning January 1, 2018, the DST imposed on a debt instrument shall now be P1.50 on every P200.00, or fractional part thereof, of the issue price of the debt instrument, pursuant to Section 55 of Republic Act No. 10963 , otherwise known as the Tax Reform for Acceleration and Inclusion (hereinafter referred to as the TRAIN Law ), which took effect on that date. Section 179 of the Tax Code now reads as follows: " 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 and fifty centavos (P1.50) 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 . . ." It must be noted, however, that a credit facility agreement, like the agreement in this case, is not subject to DST. The tax shall only be imposed on every utilization request executed by the parties and based on the amount drawn and approved by the creditor. In the event that NEC Tokin Philippines draws an advance from the credit facility, the resulting loan agreement shall definitely be subject to DST. Who has the liability to pay the DST is another issue. You argued that the loan agreement is not subject to DST because NEC Tokin Philippines is a PEZA-registered entity and thus, exempt from DST, while Sumitomo Trust Bank is a nonresident foreign corporation and as such, it is outside the taxing jurisdiction of the Philippines. Verily, PEZA-registered entities like NEC Tokin Philippines in this case are accorded tax privileges under Republic Act No. 7916 ("RA No. 7916") , otherwise known as The Special Economic Zone of 1995, as amended by Republic Act No. 8748. The pertinent provision of RA No. 7916 reads as follows: " SEC. 24. Exemption from National and Local Taxes. Except for real property taxes on land owned by developers, no taxes, local and national , shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: ATICcS a. Three percent (3%) to the National Government; b. Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." (Emphasis supplied) Based on the foregoing, NEC Tokin Philippines is exempt from the following national internal revenue taxes: a) Income tax; b) Estate and donor's taxes; c) Value-added tax; d) Other percentage taxes; e) Excise taxes; f) Documentary stamp taxes ; and g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. Therefore, if NEC Tokin Philippines obtains a loan based on the credit facility agreement and the same is utilized as intended in pursuit of its PEZA-registered activities, then it shall not be subject to DST pursuant to the above provision. However, this exemption does not mean that the loan agreement is totally free from DST since Section 173 of the Tax Code states that if one party to the loan agreement enjoys exemption from the said tax, the non-exempt party shall be the one directly liable, thus: " SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax ." (Emphasis supplied) TIADCc Therefore, Sumitomo Trust Bank cannot escape the imposition and payment of DST by simply positing that it is a nonresident foreign corporation, hence, outside the reach of taxation. Indeed, Section 173 intends to impose DST on all documents when the obligation or right subject thereof arises from Philippine sources or the property subject thereof is situated in the Philippines, without regard to the residence or nationality of the parties. 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As amended by the 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 effective January 1, 2009 .