ITAD BIR Ruling No. 050-16

April 4, 2016 ITAD BIR RULING NO. 050-16 Article 11, Philippines-Sweden tax treaty Smart Communications, Inc. Smart Tower Ayala Avenue 1226 Makati City Attention: Ms. Rina R. Manuel Tax Department Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 9, 2012, on behalf of SWEDISH EXPORT CREDIT CORPORATION (Artiebolaget Svensk Exportkredit) ("Swedish Export") , requesting confirmation that the interest paid to Swedish Export by SMART COMMUNICATIONS, INC. ("Smart") are subject to 10 percent final withholding tax rate under Article 11 of the amended Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income 1 ("Philippines-Sweden tax treaty, as amended") . It is represented that Swedish Export is a corporation organized and existing under the laws of Sweden, and is a resident thereof within the meaning of the Philippines-Sweden tax treaty per the Certificate issued by the Sweden Tax Agency dated March 8, 2011; that it is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on October 6, 2015; that Swedish Export is a Swedish state-owned corporation that serves as an export credit agency; and that, on the other hand, Smart is a corporation organized under the laws of the Philippines; and that it is engaged in the operation of integrated telecommunications services in the Philippines. It is further represented that on June 10, 2011, Smart and Nordea Bank AB ("Nordea") , a company organized and existing under the laws of Sweden, entered into an EKN Loan Agreement ("Original Agreement), whereby Nordea shall make available to Smart an export credit facility in an aggregate amount of Forty-eight Million Nine Hundred and Ninety-six Thousand Four Hundred and Twenty-one Dollars (US$48,996,421.00) for financing of the Equipment Supply Agreement and Equipment Service Agreement and for financing of the EKN Premium payable to Swedish Export Credit Guarantee Board ("EKN") ; 2 that the Smart shall be required to pay interest on the loan every interest period; 3 that the rate of interest applicable to the loan or the relevant part thereof for each interest period shall be the aggregate of the Commercial Interest Reference Rate (CIRR) Contract Rate and the Applicable Margin; 4 and that on July 1, 2011, a Loan Transfer Certificate was executed by Swedish Export and Nordea relating to the June 10, 2011 Original Agreement, whereby Nordea assigned all its rights, benefits and/or obligation under or arising from the Original Agreement to Swedish Export . It is finally represented, based on the sworn certification executed by Smart on May 20, 2013, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. ATICcS In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) (5) (a) 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. 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, 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." Thus, Article 11 of the Philippines-Sweden tax treaty, as amended, which you invoke, may apply to the instant case. It states: "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 also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, 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: a) a bond, debenture or other similar obligation of the government of the first-mentioned Contracting State or a political subdivision or a local authority thereof; or b) a loan made, refinanced, guaranteed or insured, or a credit extended, refinanced, guaranteed or insured by (i) in the case of the Philippines, Bangko Sentral ng Pilipinas (BSP); (ii) in the case of Sweden, the Central Bank of Sweden, the Swedish International Development Cooperation Agency (SIDA), the Swedish Export Credit Corporation (SEK), the Swedish Export Credits Guarantee Board (Exportkreditnamndem) or any other institution of a public character with the objective to promote exports or development; (iii) other governmental agencies or lending institutions as may be specified and agreed in an exchange of notes between the competent authorities of the Contracting States. TIADCc 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 such securities, 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 and 2 shall not apply if the beneficial owner 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 independent personal 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 case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply." Based on the above provisions, interest derived by a corporation which is a resident of Sweden may qualify for a preferential rate of 10 percent of the gross amount thereof under the Philippines-Sweden tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if such corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. In view of the foregoing, and considering that Swedish Export and EKN are the beneficial owners of the interest and premium payable, respectively, this Office is of the opinion and so holds that the interest to be paid by Smart to Swedish Export and EKN pursuant to the Loan Agreement is not subject to Philippine income tax pursuant to Article 11 (3) (b) (ii) of the Philippines-Sweden tax treaty, as amended. Moreover, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Effective on January 1, 2004. 2. "EKN" means the Swedish Export Credit Guarantee Board, a Swedish government agency and guarantee institution currently located at Kungsgatan 36 (P.O. Box 3064). S-103 61 Stockholm, Sweden. 3. "Interest Period" means, in relation to any Advance or a Loan, an interest period ascertained in accordance with clause 5.02. 4. "Applicable Margin" means zero point zero percent (0.00%) per annum which is calculated by deducting from the fixed rate expressed as a percentage of zero point two five percent (0.25%) per annum minus the administrative remuneration expressed as a percentage of zero point two five percent (0.25%) per annum payable by SEK to the Arranger.