ITAD BIR Ruling No. 036-12

February 8, 2012 ITAD BIR RULING NO. 036-12 Article 11 (Interest) Philippines-Korea tax treaty Donggwang Clark Corporation 2323-A Pinatubo Street Clark Freeport Zone Clarkfield, Pampanga Attention: Do Sik Park General Manager Gentlemen : This refers to your tax treaty relief application dated November 23, 2010 requesting confirmation that interest paid by Donggwang Clark Corporation ("Donggwang Clark") to Donggwang Construction Company Ltd. ("Donggwang Construction") is subject to income tax at the rate of 15 percent 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 Donggwang Construction is a corporation organized and existing under the laws of Korea based on the Transcript of Corporate Register issued by the Central Registry Management Office in Korea on May 3, 2010, and on the Certificate for Business Registration issued by the Gangseo District Tax Office in Korea on May 3, 2010; that Donggwang Construction is situated at 678-7, Deungchon-dong, Gangseo-gu, Seoul, Korea; that Donggwang Construction 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 July 7, 2010; and that, on the other hand, Donggwang Clark is a domestic corporation situated at 2323-A Pinatubo Street, Clark Freeport Zone, Clarkfield, Pampanga, Philippines. It is further represented that Donggwang Clark and Donggwang Construction entered into several Loan Agreements in 2009 and 2010 where each loan has a maturity of two years and bears compounded interest at the rate of 15 percent or 10 percent per annum; that each loan and its corresponding interest will be paid on the maturity of the loan; that any amount not paid on its maturity is liable to a penalty equivalent to 20 percent or 15 percent per annum, as the case may be, if the delay does not exceed 30 days, and 25 percent or 20 percent per annum, as the case may be, if the delay exceeds 30 days; that each loan may be prepaid prior to its maturity; that Donggwang Clark will pay Donggwang Construction by depositing to the latter's designated bank account the payable amount in cash, check, or other negotiable instruments; and that the amount of the loans subject of the Loan Agreements are as follows. ASEIDH Date of Loan Amount of Loan Date of Maturity Rate of Interest Agreement (in U.S. dollars) 1. July 27, 2009 80,000.00 July 26, 2011 15 percent 2. September 14, 2009 32,000.00 September 13, 2011 15 percent 3. September 22, 2009 40,000.00 September 21, 2011 15 percent 4. September 28, 2009 150,000.00 September 27, 2011 15 percent 5. October 21, 2009 90,000.00 October 20, 2011 15 percent 6. December 9, 2009 100,000.00 December 9, 2011 15 percent 7. December 22, 2009 70,000.00 December 21, 2011 15 percent 8. January 26, 2010 20,000.00 January 25, 2012 15 percent 9. February 10, 2010 90,000.00 February 9, 2012 15 percent 10. March 3, 2010 50,000.00 March 2, 2012 15 percent 11. March 17, 2010 800,000.00 March 16, 2012 15 percent 12. April 27, 2010 670,000.00 April 26, 2012 15 percent 13. May 31, 2010 600,000.00 May 30, 2012 15 percent 14. June 14, 2010 800,000.00 June 13, 2012 15 percent 15. June 18, 2010 275,000.00 June 17, 2012 15 percent 16. July 2, 2010 300,000.00 July 1, 2012 15 percent 17. July 8, 2010 300,000.00 July 7, 2012 15 percent 18. July 12, 2010 650,000.00 July 11, 2012 15 percent 19. August 10, 2010 1,070,000.00 August 9, 2012 15 percent 20. August 26, 2010 300,000.00 August 25, 2012 15 percent 21. September 1, 2010 200,000.00 August 31, 2012 10 percent 22. September 9, 2010 1,000,000.00 September 8, 2012 10 percent 23. October 13, 2010 600,000.00 October 12, 2012 10 percent It is further represented based on the Certifications issued by the Senior Customer Relationship Officer and Customer Service Head of Rizal Commercial Banking Corporation 1 on August 16 and September 3, 2010, and July 11, 2011, and on the Certifications of Inward Remittances issued by the Senior Manager of Security Bank Corporation 2 on July 4 and August 5, 2011, that the following amounts were remitted to the accounts of Donggwang Clark in these banks: Date of Remittance Amount of Remittance Date of Remittance Amount of Remittance (in U.S. dollars) (in U.S. dollars) July 28, 2009 79,982.00 June 2, 2010 600,000.00 September 16, 2009 32,000.00 June 15, 2010 799,980.00 September 23, 2009 40,000.00 June 18, 2010 274,980.00 September 29, 2009 150,000.00 July 2, 2010 300,000.00 October 23, 2009 90,000.00 July 8, 2010 300,000.00 December 9, 2009 (No certificate attached) July 13, 2010 650,000.00 December 23, 2009 70,000.00 August 11, 2010 1,070,000.00 February 2, 2010 19,986.00 August 26, 2010 300,000.00 February 11, 2010 90,000.00 September 3, 2010 200,000.00 March 4, 2010 49,992.00 September 13, 2010 1,000,000.00 March 22, 2010 800,000.00 October 13, 2010 600,000.00 April 29, 2010 670,000.00 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 tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Corporate Secretary of Donggwang Clark on January 21, 2011. In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, the interest payable to Donggwang Construction is subject to income tax at the rate of 20 percent, thus: cEaCAH "SEC. 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, under Section 32 (B) (5) of the Tax Code, 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: "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." Relative thereto, you invoke the Philippines-Korea tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide as follows: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the 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: aIETCA (i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or (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." Under paragraphs 2 and 3 of Article 11, interest arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in respect of public issues of bonds debentures or similar obligations, or if the interest is paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and (b) 15 percent in all other cases. Moreover, under paragraph 4 of the same article, such interest is exempt if it is paid in respect of (i) a bond, debenture or other similar obligation of the government of the Philippines, or a political subdivision or local authority of the Philippines, or (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank, or any other qualified lending institution in Korea. Accordingly, since Donggwang Clark is not registered with the Board of Investments as such, and since the Loan Agreements out of which the interest is paid is not in respect of public issues of bonds, debentures or similar obligations of Donggwang Clark, and since the Loan Agreements are not made, extended, guaranteed, or insured by the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank, or any qualified lending institution in Korea, such interest to be paid by Donggwang Clark to Donggwang Construction is subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-Korea tax treaty. LLphil Furthermore, under Section 179 of the Tax Code, the Loan Agreements, being debt instruments, are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of each loan provided by Donggwang Construction to Donggwang Clark, 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." 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. ADHCSE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. At Berthaphil III Clark Center, Jose Abad Santos Avenue, Clark Freeport Zone, Clarkfield, Pampanga, Philippines. 2. At Security Bank Centre, 6776 Ayala Avenue, Makati City Philippines.