ITAD BIR Ruling No. 046-13

March 5, 2013 ITAD BIR RULING NO. 046-13 Article 11, Philippines-Japan tax treaty Chaves Hechanova and Lim Law Offices Unit 7D, 7th Floor Corinthian Plaza Condominium 121 Paseo de Roxas corner Gamboa Street Makati City Attention: Atty. Alfredo C. Lim Atty. Maria Regina A. Ruiz Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 12, 2011 requesting confirmation that interest paid by S'Next Philippines, Inc. ("S'Next Philippines") to Molex Japan Company Ltd. ("Molex") is subject to income tax at the 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") . 1 Facts Molex is a foreign corporation and a resident of Japan based on its Articles of Incorporation, on the Complete Record of Current Particulars issued by the Yokohama Legal Affairs Bureau in Japan on June 16, 2011, and on its Residence Certificate issued by the Yamato Tax Office in Japan on January 13, 2011. Molex is located at 1-5-4 Fukami-Higashi, Yamato, Kanagawa, Japan. 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 September 22, 2011. On the other hand, S'Next Philippines is a domestic corporation located at 7170 Blue Diamond corner Feati Streets, Clark Freeport Zone, Pampanga, Philippines. On August 1, 2011, S'Next Philippines and Molex entered into an Intercompany Revolving Line of Credit Loan Agreement where Molex granted S'Next Philippines a credit facility amounting $1,185,000.00 for the period August 1 to December 31, 2011. S'Next Philippines will settle the amount of loan for each remittance on a staggered basis in accordance with its latest cash flow forecast as provided to Molex on a monthly basis. Any funds loaned will be evidenced by an instrument. The facility bears a fixed rate of interest at 2.25 percent per annum payable semiannually on June 15 and December 15 of the year. All outstanding loans and interests thereon are payable on November 9, 2012. SIDTCa Based on the Certificate of Inward Remittance issued by Rizal Commercial Banking Corporation 2 on September 7, 2011, Molex (through Bank of Tokyo) remitted the amount of $500,000.00 to S'Next Philippines on August 8, 2011 which was subsequently credited to the latter's account on that date. Ruling In reply, please be informed that since the relevant TTRA was filed on October 12, 2011 , and the first payment of interest subject thereof will be made later on December 15, 2011 , such interest paid on that date and thereafter shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) , to wit: "SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event ." (Emphasis ours) Relative thereto, interest arising in the Philippines and paid to a resident of the Philippines is subject to relief under Article 11 of the Philippines-Japan tax treaty, to wit: "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." TAScID Under Article 11, interest arising in the Philippines and paid to a resident of Japan is subject to income tax at a rate not to exceed 10 percent. Accordingly, since Molex is a resident of Japan, such interest paid to it by S'Next Philippines shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty. Furthermore, under Section 179 of the National Internal Revenue Code of 1997, as amended, all instruments executed by S'Next Philippines as evidence of loans utilized under the credit facility, 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 the loan indicated in each instrument (which to date amount to the Philippine peso equivalent of $500,000.00), 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." 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. aDECHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES 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 . 2. Located at Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City, Philippines.