ITAD BIR Ruling No. 049-16

April 4, 2016 ITAD BIR RULING NO. 049-16 Article 12, Philippines-US tax treaty Martelino Bacungan & Associates Law Offices 22/F, Unit 2201 Atlanta Centre 31 Annapolis Street, Greenhills San Juan City Attention: Atty. Raymund G. Martelino Gentlemen : This refers to your Tax Treaty Relief Application filed December 13, 2013, on behalf of CARGILL FINANCIAL SERVICES INTERNATIONAL, INC. ("Cargill") , requesting confirmation that Cargill interest income earned from time deposit accounts with DEUTSCHE BANK AG MANILA ("Deutsche Bank") are subject to preferential rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-US tax treaty") . It is represented that Cargill is a corporation organized and existing under the laws of the United States of America (US) and a resident thereof per the Certificate of Residence issued by the US Tax Authority dated August 26, 2013; that Cargill is engaged in the business of lending and other financial trading activities as a financial institution; 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 dated December 9, 2013; and that, on the other hand, Deutsche Bank , a duly-registered banking institution, is a corporation organized and existing under the laws of the Philippines. It is further represented that based on Certification issued by Deutsche Bank on November 18, 2013, Cargill placed time deposits as follows: Amount (Php) Value Date Maturity Date Client Rate Net Interest 1,000,000,000.00 Oct. 18, 2013 Jan. 20, 2014 0.25% P456,944.44 300,000,000.00 Oct. 9, 2013 Jan. 8, 2014 0.25% P132,708.33 300,000,000.00 Oct. 9, 2013 Jan. 8, 2014 0.25% P132,708.33 415,000,000.00 Oct. 9, 2013 Jan. 8, 2014 0.25% P183,579.86 In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." CAIHTE xxx xxx xxx Thus, as a general rule, payment for interest income paid to Cargill , as a nonresident foreign corporation, is subject to withholding tax at the rate of thirty percent (30%) under Section 28 (B) (1) of NIRC. However said income may be exempt from income tax or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the NIRC 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." Relative thereto, Article 12 of the Philippines-US tax treaty, which you invoke, may apply to the instant case. It states: "Article 12 Interest 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. 3. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. 4. Notwithstanding paragraphs 1, 2, and 3, interest derived by a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the Philippines, the Federal Reserve Banks of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States, and such other institutions of either Contracting State as the competent authorities of both Contracting States may determine by mutual agreement), or b) A resident of one of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof. shall be exempt from tax by the other Contracting State. xxx xxx xxx 7. The term 'interest' as used in this Convention 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 or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." Under Article 12, interest arising in the Philippines and paid to a resident of the United States 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 bonded indebtedness in the Philippines, and (b) 15 percent in all other cases. However, the reduction of tax will not apply if the interest is effectively connected with a permanent establishment (if the recipient is an enterprise) or a fixed base (if the recipient is an individual performing independent personal services) which the recipient has in the Philippines. DETACa With respect to cash deposits commentaries of the Organisation for Economic Cooperation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010) consider such income as interest for purposes of Article 11 of a tax treaty, to wit: "Paragraph 3 18. Paragraph 3 specifies the meaning to be attached to the term 'interest' for the application of the taxation treatment defined by the Article. The term designates, in general, income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in profits. The term 'debt-claims of every kind' obviously embraces cash deposits and security in the form of money, as well as government securities, and bonds and debentures, although the three latter are specially mentioned because of their importance and of certain peculiarities that they may present. It is recognized, on the other hand, that mortgage interest comes within the category of income from movable capital (revunes de capitaux mobiliers), even though certain countries assimilate it to income from immovable property. On the other than, debt-claims, and bonds are debentures in particular, which carry a right to participate in the debtor's profits are nonetheless regarded as loans if the contract by its general character clearly evidences a loan at interest." (Emphasis added) (Page 212) In view thereof, considering that Cargill is a resident of US, and since the interest subject is not paid in respect of public issues of bonded indebtedness in the Philippines, such interest paid by Deutsche Bank to Cargill shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 12 of the Philippines-US tax treaty. Finally, the time deposits of Cargill , based on the actual amount of deposits, are subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended, which provides: "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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.