ITAD BIR Ruling No. 050-14

May 2, 2014 ITAD BIR RULING NO. 050-14 Article 11, Philippines-Spain tax treaty Amadeus Marketing Philippines, Inc. 36th Floor LKG Tower 6801 Ayala Avenue Makati City Gentlemen : This refers to your application for tax treaty relief filed on February 25, 2013, requesting confirmation that the interest payments by Amadeus Marketing Philippines, Inc. ("Amadeus PH") to Amadeus IT Group SA ("Amadeus SA") are subject to preferential rate of 15 percent pursuant to the Convention between the Republic of the Philippines and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Spain tax treaty") . Basic Representations It is represented that Amadeus SA is a foreign corporation organized and existing under the laws of Spain with principal address at Calle Salvador de Madariaga, Madrid based on the Declaration of Fiscal Residence issued by the tax authority of Spain on February 2, 2012; that Amadeus SA is not registered either as a corporation or as a partnership based on the Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission on January 18, 2013; that Amadeus SA holds 1,327,532 shares with a value of PhP132,753,200.00 in Amadeus PH based on the Certification issued by the Corporate Secretary of Amadeus PH on January 22, 2013; and that on the other hand, Amadeus PH is a domestic corporation with business address at the 36th Floor LKG Tower 6801 Ayala Avenue, Makati City. It is also represented that on November 2, 2012, Amadeus SA and Amadeus PH entered into a Revolving Credit Facility Agreement ("Agreement") whereby Amadeus SA grants to Amadeus PH a Credit Facility up to a maximum amount of USD2,800,000.00; that Amadeus PH may dispose of the total amount of the credit during the availability period from November 2, 2012 up to November 1, 2015; that Amadeus PH shall pay interest rate applicable which is the sum of: (i) 7, 15 days or 1, 2, 3, 6, 9 or 12 month USD Libor, and (ii) the margin of 168 basis points TIHCcA that interest will accrue on actual calendar days over 360 days/year basis; that Amadeus PH made an initial drawdown in the amount of USD250,000.00 on November 6, 2012; and that as of May 16, 2013, no actual payment of interest on the loan has been made based on the Certification issued by the General Manager of Amadeus PH on even date. Ruling A. On income tax In reply, please be informed that Sections 28 (B) (1) and 25 (B), respectively, of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provide: "SEC. 28. Rates of Income Tax on Foreign Corporations. . . . (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%)". However, such interests may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. 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" Relative thereto, you invoke the Philippines-Spain tax treaty . Article 11 thereof provides: HacADE " Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) in respect of issues of bonds, debentures or similar obligations offered to the general public. b) 15 per cent of the gross amount of such interest in all other cases . 3. Notwithstanding the provisions of paragraph 2, a) Interest arising in a Contracting State and paid to a resident of the other Contracting State in respect of a bond, debenture or other similar obligation of the Government of the first-mentioned Contracting State or of a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other Contracting State; b) Interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: (i) in the case of Spain, the Bank of Spain and the Spanish official credit institutions, and (ii) in the case of the Philippines, the Central Bank of the Philippines or such lending institution as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. EaTCSA 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 or debentures, including premiums and prizes attaching to bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. " (underscoring supplied) Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of Spain may be subject to income tax in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) in respect of issues of bonds, debentures or similar obligations offered to the general public. b) 15 per cent of they gross amount of such interest in all other cases. Under paragraph 3 of the same article, such interest may be exempt if a) the interest is paid in respect of a bond, debenture or other similar obligation of the Government of Spain or of a political subdivision or local authority thereof, provided that the interest is beneficially owned by a resident of Spain; b) if the interest is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: (i) in the case of Spain, the Bank of Spain and the Spanish official credit institutions, and (ii) in the case of the Philippines, the Central Bank of the Philippines or such lending institution as is specified and agreed in letters exchanged between the competent authorities of Spain and the Philippines. Accordingly, the interest payments made by Amadeus PH to Amadeus SA under the Agreement are subject to income tax in the Philippines at the rate of 15 percent of the gross amount thereof pursuant to paragraph 2 (b), Article 11 of the Philippines-Spain tax treaty, the transaction not falling under the exemptions enumerated under Article 11 (3) of the Philippines-Spain tax treaty. On documentary stamp tax Finally, the Agreement is 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." EcDSTI 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 Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.