Chaves Hechanova & Lim Law Offices

March 16, 2018 ITAD BIR RULING NO. 042-18 Article 11, Philippines-Japan tax treaty, as amended Chaves Hechanova & Lim Law Offices Unit 7D, 7th Floor, Corinthian Plaza Condominium 121 Paseo de Roxas cor. Gamboa Sts., Makati City Attention: AAA BBB Gentlemen : This refers to your letter dated August 23, 2010 requesting, on behalf of S'Next Co. Ltd. (" S'Next "), confirmation that the interests due on loans made by "S'Next" to S'Next Philippines, Inc. (" S'Next Phil ") are subject to the 10 percent preferential tax rate pursuant to the amendment 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 Income ("Philippine-Japan tax treaty, as amended") . HCaDIS It is represented that S'Next is a corporation organized and existing under the law of Japan, as evidenced by the Certificate of All Registered Matters Including Recent Historical Records of S'Next; 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; and that, on the other hand, S'Next Phil is a corporation duly organized and existing under the law of the Philippines. It is also represented that S'Next and S'Next Phil entered into two (2) Loans Agreements ("Agreements") , as follows: 1. On September 24, 2009, S'Next extended S'Next Phil a _______ Japanese Yen (JP 30,000,000.00) loan with a __________ Percent (_____%) annual interest rate, payable on a semi-annual basis with September 23, 2011 as maturity date; and, 2. On February 2, 2010, S'Next extended S'Next Phil a _________ Dollar (USD 200,000.00) loan with a __________ Percent (_____%) annual interest rate, payable on a semi-annual basis with February 3, 2012 as maturity date. As proof of inward remittance, S'Next presented a Certificate of Inward Remittance showing that S'Next Phil received an inward remittance in the amount of JP__________ with US Dollar equivalent of ____________________ (USD__________) as well as Certificate of Inward Remittance showing that S'Next Phil received an inward remittance in the net amount of ________________ Dollars (USD__________). It is finally represented that the issue or transaction subject of the application for tax treaty relief is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal, as certified by S'Next Phil.'s Corporate Secretary. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, applies, in general, to interest derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporation . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as x x x, interest, x x x: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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" Thus, Article 11 of the Philippines-Japan tax treaty, as amended, which you have invoked, may apply to your instant request for relief. It provides: " Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that 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 percent of the gross amount of the interest. AHCETa 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 and debentures, including premiums and prizes attaching to such securities, bonds, or debentures. xxx xxx xxx" Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at a rate not to exceed 10 percent of the gross amount of the interest, provided the recipient is the beneficial owner of the interest. Therefore, the interest paid by S'Next Phil to S'Next, being the beneficial owner of the interest, shall be subject to 10 percent of the gross amount of the interest pursuant to Article 11 (2) (b) of the Philippines-Japan tax treaty, as amended. Moreover, the Loan Agreements shall be subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. 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