ITAD BIR Ruling No. 062-10

November 17, 2010 ITAD BIR RULING NO. 062-10 ABC Asia-Pacific Business Legal Consulting 2nd Floor, Building B, Mactan Marina Mall Mactan Economic Zone 1, Pusok Lapulapu City, Cebu Attention: Atty. Emery Joy A. Tiu Partner Gentlemen : This refers to your letter dated July 1, 2008 requesting confirmation that interest to be paid by Tsuneishi Heavy Industries (Cebu),Inc. ("Tsuneishi") to the Japan Bank for International Cooperation ("JBIC") is exempt from income tax in the Philippines 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 Basic Facts It is represented that JBIC is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan, based on the Certification issued by the Kojimachi Tax Office in Japan on May 26, 2008; that JBIC is a financial institution created under Law No. 35 of Japan on October 1, 1999, whose capital is subscribed by the Government of Japan; that JBIC is situated at 4-1 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo 100-8144, Japan; and that JBIC is not registered as a corporation or as a partnership in the Philippines, based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on May 15, 2008. It is also represented that JBIC is the successor to the Export-Import Bank of Japan ("JEXIM") and the Overseas Economic Cooperation Fund ("OECF") ,based on the letter of the Ministry of Finance of Japan to the Bureau of Internal Revenue on June 17, 2008; and that the purpose of JBIC is (1) to contribute to the sound development of Japan and to the international economy and society through lending, etc.;(2) to contribute to the promotion of exports and imports of Japan and of Japanese economic activities overseas, and to the stability of the international financial order, through lending, etc.,(hereinafter referred to "international financial operations" );(3) and to contribute to the social and economic development or stability of developing areas overseas, thorough concessional financial terms of interest and period of repayment, etc.,(hereinafter referred to as "overseas economic cooperation operations" );all in accordance with the principle that JBIC will not compete with ordinary financial institutions; that, beginning October 1, 2008, JBIC will be reorganized and as a result thereof its international financial operations will be taken over by the Japan Finance Corporation ("JFC") and its overseas economic cooperation operations by the Japan International Cooperation Agency ("new JICA") ;that JFC and the new JICA will maintain the status of wholly-owned government financial institutions who will assume all the rights and obligations of JBIC with respect to its operations; and that JFC is a financial institution created under Law No. 57 of Japan in 2007, and its total outstanding shares are held, at all times, by the Government of Japan. SIacTE The Loan Agreement between JBIC and Tsuneishi It is further represented that on March 28, 2008, JBIC and Tsuneishi (a domestic corporation situated at West Cebu Industrial Park Special Economic Zone, Buanoy, Balamban, Cebu 6041, Philippines) entered into a Loan Agreement where JBIC granted a loan facility to Tsuneishi in an aggregate amount not to exceed Nine Billion Yen (9,000,000,000.00);that the loan facility will be utilized to finance the construction of a graving dock and support facilities at Tsuneishi to accommodate the construction of larger ships (dead weights from 52,000 to 70,000 metric tons) there; that Tsuneishi shall pay interest on each disbursement of the loan facility at the rate of (1) the aggregate of the Base Rate 2 applicable to such disbursement according to its repayment conditions and its period until maturity plus 0.15 percent per annum, or (2) the Floor Rate 3 to be determined by JBIC on the date of each disbursement, whichever is higher; that the principal of the loan will be repaid in 16 equal payments of 562,500,000.00, on September 20 and March 20 of each year, beginning September 20, 2010, until March 20, 2018; that the interest of the loan will be paid on September 20 and March 20 of each year, beginning September 20, 2010, until March 20, 2018; and that all payments will be made in Japanese yen and remitted to the account of JBIC (Current Account No. 0143348) at the Bank of Tokyo-Mitsubishi UFJ, Ltd. Head Office in Japan. It is further represented based on the three Certifications by the Manager of Unionbank, 4 Mr. Nicomedes Z. Gonzales, one dated July 22, 2008 and the other two dated August 10, 2010, 5 inward remittances each amounting to 2,999,997,500.00 were credited to the account of Tsuneishi (Account No. 13-066-000-1642) on July 21 and December 23, 2008, and March 29, 2010. It is finally represented based on the notarized Affidavit by the President of Tsuneishi ,Mr. Shinji Watadani, dated May 26, 2008, that the interest subject of the application for tax treaty relief is not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling In reply, please be informed that a foreign corporation like JBIC, whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") ,as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is invoked for this purpose is the Philippines-Japan tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 of the tax treaty provides: "Article 11 1. 2. a) EcTaSC b) 3. 4. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: a) b) c) 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 ("Amending Protocol") , signed on December 9, 2006, and effective January 1, 2009, amended Article 11 of the Philippines-Japan tax treaty. Paragraph 2 was amended, paragraph 3 was deleted, and paragraph 4 was amended and renumbered as the new paragraph 4, thus: "Article IV Paragraphs 2, 3, 4, 5, 6, 7 and 8 of Article 11 of the Convention shall be deleted and replaced by the following: '2. 3. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: a) b) c) TaISEH Under the new paragraphs 2 and 3 of Article 11 of the Philippines-Japan tax treaty, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed 10 percent of the gross amount of the interest. Moreover, such interest may be exempt if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, or a financial institution wholly owned by the Government of Japan. Accordingly, inasmuch as JBIC is a financial institution wholly owned by the Government of Japan, and that JFC having taken over all the rights and obligations of JBIC with respect to the latter's international financial operations beginning October 1, 2008, such interest to be paid by Tsuneishi to JFC pursuant to the Loan Agreement, beginning September 20, 2010, shall be exempt from income tax in the Philippines. B. n On documentary stamp tax Finally, pursuant to Section 179 of the Tax Code of 1997, as amended, the Loan Agreement shall be subject to documentary stamp tax as follows: "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 Footnotes 1. Signed on February 13, 1980, and effective January 1, 1981. 2. Base Rate means the interest rate per annum (rounded upward to the nearest 0.1 percent) calculated by JBIC and which applies to the relevant terms of repayment (annual, semiannual, etc.) and to the semiannual period from the date of disbursement until each repayment date (rounded upward to the nearest half year) of a loan based on the yield curve and the discount rate calculated by JBIC on a semiannual basis by using the yield of Japanese Government Bonds, Japanese Treasury Bills, or Japanese Financing Bills. 3. Floor Rate means the interest rate per annum calculated based on the arithmetic mean of the yields of corporate bonds issued by financial institutions designated by JBIC which have a term of five years until their due date (the arithmetic mean rounded upward to the nearest 0.05 percent of the compound yield quoted in the reference yields for over-the-counter bond transactions published by the Japan Securities Dealers Association with respect to such bonds having a term of more than four years but less than six years until their due date). 4. Situated at Unionbank Plaza, Meralco Avenue corner Onyx and Sapphire Roads, Ortigas Center, Pasig City, Philippines. 5. The name that appears in these two certifications is "Nick Gonzales" as the manager of the said bank. n Note from the Publisher: Copied verbatim from the official document.