ITAD BIR Ruling No. 053-15

March 25, 2015 ITAD BIR RULING NO. 053-15 Article 10, Philippines-UK tax treaty San Miguel Corporation 40 San Miguel Avenue Mandaluyong City Metro Manila Attention: Alfredo R. Villacorte Tax Manager Gentlemen : This refers to the tax treaty relief application you filed on October 22, 2010 on behalf of the STANDARD CHARTERED BANK ("SCB") on the interest income derived by SCB from SAN MIGUEL CORPORATION ("SMC") pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty"). It is represented that SCB, with headquarters located at 1 Aldermanbury Square, London EC2V 7SB, United Kingdom (UK), is a corporation duly organized and existing under the laws of England, a resident of the UK and subject to UK tax on its total income as evidenced by the Tax Residency Certificate issued by the Tax Specialist-Direct Tax, Large Business Service, Financial Sector Group of the HM Revenue and Customs, London, England dated February 24, 2011; that SCB has a Regional Headquarters ("SCB-RHQ") in the Philippines duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. F199800007; and that SMC, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at 40 San Miguel Avenue, Mandaluyong City, Manila. It is further represented that on August 27, 2010, SMC as "Borrower", the Standard Chartered Bank (Hong Kong) Limited as "Facility Agent", eleven (11) Financial Institutions as "Arrangers", with SCB as one (1) of the sixteen (16) "Existing Lenders" and other various Financial Institutions as "New Lenders", entered into a Syndication and Amendment Agreement ("SAA") in relation to the US$880,000,000.00 Facility Agreement ("Facility Agreement") dated July 15, 2010; that under the Facility Agreement, SCB's lending commitment is US$80,000,000; that the rate of interest on each loan for each Interest Period relating thereto is the rate per annum determined by the Facility Agent to be the aggregate of the applicable Margin, and LIBOR; that pursuant to the SAA, the provisions of the Facility Agreement and the other Finance Documents shall continue in full force and effect subject to the following amendments: a) each New Lender will become a Lender under the SAA, and b) the Facility Agreement shall be amended such that the words "USD880,000,000" shall be deleted and replaced with USD1,000,000,000; that the purpose of the loan is to refinance of SMC's existing financial indebtedness and for general working capital purposes; and that inward remittances in the amounts of USD120,000,000.00 and USD260,621,701.99 were credited to SMC's account in SCB-RHQ on July 26, 2010 and December 29, 2010, respectively. It is finally represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Tax Manager of SMC dated October 20, 2010. In reply, please be informed that a foreign corporation like SCB, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code ("NIRC") of 1997, as amended, provides: ATHCDa "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this case, since SCB is a resident of the United Kingdom for tax treaty purposes and although it has a regional headquarters established in the Philippines, SCB-RHQ certifies that it has no participation in the Facility Agreement and that the interest derived on the Facility Agreement will further not be paid to SCB-RHQ, per Certification by SCB-RHQ dated July 10, 2013, interests derived herein are generally subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the NIRC of 1997, which states: "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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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." Hence, the provisions of Article 10 of the Philippines-UK tax treaty, which you invoked, may apply. It provides: "Article 10 Interest 1. Interest arising in a Contracting State which is derived and beneficially owned by 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 law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. 4. Notwithstanding the provisions of paragraphs 2 and 3 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: a) the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term "instrumentality" as used in this paragraph means any agency or entity created or organised by either Contracting Government in order to carry out governmental functions. STECAc 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 6. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or 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 13, as the case may be, shall apply. . . ." Based on the above, interest arising in the Philippines and derived by a resident of the United Kingdom is subject to Philippine income tax at the rate of (a) 10 percent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations; or (b) 15 percent of the gross amount of the interest in all other cases. Such interest is even exempt from Philippine income tax if it is derived and beneficially owned by the Government of the United Kingdom, a political subdivision or local authority thereof or an instrumentality of the United Kingdom, or if the interest is paid in respect of a loan made, guaranteed, or insured by the government of the United Kingdom, or any agency or instrumentality (including a financial institution) owned or controlled by the government of the United Kingdom. However, SCB cannot avail of the preferential rates if it carries on business in the Philippines through a fixed place therein (like in the instant case, a Regional Headquarters) and the right to receive interest is effectively connected with such fixed place of business of SCB in the Philippines. However, in a Sworn Certification executed by the Chief Executive Officer of SCB-RHQ on July 10, 2010, he attested that SCB-RHQ has no participation in the SAA and that the interest derived therefrom will not be paid to it. Hence, the requested relief for the subject interest may still be availed of. Accordingly, all interests to be paid by SMC to SCB under the SAA are subject to Philippine income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) of the Philippines-UK tax treaty. Such interests to be paid cannot be subject to the lower rate of 10 percent under paragraph 3, or be exempt under paragraph 4, of Article 10, because the conditions laid down in availing either of these more preferential treatments are not satisfied in the case of the subject interest. Finally, the subject agreement, based on the amount actually drawn down, is subject to documentary stamp tax under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243, 1 at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. This ruling is issued on the basis of the foregoing 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. Entitled "An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for other Purposes," signed into law on February 17, 2004, and effective March 20, 2004.