ITAD BIR Ruling No. 066-10

November 30, 2010 ITAD BIR RULING NO. 066-10 Article 11 (Interest) Philippines-Netherlands tax treaty; BIR Ruling No. 1-99; BIR Ruling No. DA-ITAD 107-07; BIR Ruling No. DA-ITAD 130-06; BIR Ruling No. DA-ITAD 104-06; BIR Ruling No. DA-ITAD 193-03 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Malou P. Lim Partner, Tax Services Gentlemen : This refers to your letter dated February 12, 2008 (as supplemented by another letter dated February 10, 2009) requesting confirmation that interest to be paid by Investments 2234 Philippines Fund I (SPV-AMC) ("Investments Philippines") to Investments 2234 Overseas Fund VIII B.V. ("Investments Overseas") is subject to income tax in the Philippines at the rate of 15 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . 1 Basic Facts It is represented that Investments Overseas is a foreign corporation organized and existing under the laws of the Netherlands based on its Articles of Association; that the primary objects of Investments Overseas are (a) to acquire, purchase, and conduct the management and collection of, and to dispose or encumber receivables and other assets, including (without limitation) the foreclosing on, holding, and selling of collaterals with respect thereto; (b) to borrow, to lend and to raise funds, and to issue bonds, promissory notes and other securities or evidence of indebtedness, and to enter into agreements in connection with the aforementioned activities; (c) to invest and lend any funds held by Investments Overseas ; and (d) to hedge interest rates and other risks by entering into derivatives agreements, including swap agreements and option agreements; that Investments Overseas is situated at Herengracht 469, 1017 BS Amsterdam, the Netherlands; that Investments Overseas 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 ("SEC") on December 21, 2007; that, on the other hand, Investments Philippines is a domestic corporation situated at the 4th Floor, 105 Paseo de Roxas, Makati City, Philippines; that based on the Certificate of Corporate Filing/Information issued by the SEC on January 14, 2008, Investments Philippines was registered with the SEC on May 11, 2007, under SEC Registration No. CS200707320, and that no amended articles of incorporation to dissolve the corporation has been filed at the SEC; and that the primary purpose of Investments Philippines is to invest in or acquire non-performing assets ("NPAs") of financial institutions consisting of non-performing loans ("NPLs") , and to acquire land and real and other properties owned and acquired ("ROPOAs") . HScDIC It is also represented that on July 24, 2007, Investments Overseas and Investments Philippines entered into a Loan Agreement where Investments Overseas granted Investments Philippines a loan of US$17,650,000.00 (the "Loan" ) to fund the latter's investments in NPLs and NPAs and to serve as its additional working capital; that the Loan bears interest at the rate of 15 percent per annum to be computed based on the outstanding principal of the Loan and to be paid on the anniversary of each drawdown; that the principal and all accruing interests of the Loan will be paid in full on the last business day of the fifth anniversary of the drawdown of the Loan, or on a later date as the parties may agree; and that all payments will be made in United States Dollars and remitted on their due dates; that the Agreement will be effective upon obtaining approval from the Bangko Sentral ng Pilipinas ("BSP") of the Loan; and that based on the Certificate issued by the Assistant Corporate Secretary of Investments Philippines on September 24, 2010, the Loan was approved by and registered with the BSP on August 10, 2007, as confirmed by the latter's letter to Investments Philippines dated August 10, 2007, and the relevant Certification issued by the BSP which shows the registration details of the Loan (BSP-ID (FB) 2007-453 dated August 10, 2007), the Schedule of Payments of the Loan (Part I) and the Details of Fix/Hedging Transactions for the Loan (Part II). It is further represented based on Certificate of Inward Remittance of Foreign Exchange No. 2006-00021-0040 issued on July 3, 2007, by the branch office in the Philippines of the Bank of America N.A. (situated at the Philamlife Tower, Paseo de Roxas, Makati City, Philippines) that Investments Overseas (through the Bank of America in Amsterdam, the Netherlands) remitted the exact amount of the Loan (equivalent to PHP814,018,000.00) on June 28, 2007, to the account of Investments Philippines (Peso Account No. 60519-016) at the said branch office; and that, subsequently, on July 24, 2007, Investments Philippines issued a Promissory Note to Investments Overseas where Investments Philippines promised Investments Overseas to pay the principal and the accruing interests of the Loan in accordance with the schedule of payments under the Loan Agreement. It is finally represented based on the Certification issued by the Assistant Corporate Secretary of Investments Philippines on April 2, 2008, that the interest subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling A. On income tax In reply, please be informed that a foreign corporation like Investments Overseas , 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) 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) 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." However, any income may be exempt from income tax (or partially exempt if subject to a reduced rate only) 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: 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." STcAIa With respect to a treaty, what you invoked for this purpose is the Philippines-Netherlands tax treaty. Article 11 thereof provides: "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State." Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of the Netherlands 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 percent of the gross amount of the interest if it is paid with respect to the sale on credit of any industrial, commercial or scientific equipment, to a loan granted by a bank or a financial institution, or to public issues of bonds, debentures, or similar obligations; and (b) 15 percent of the gross amount of the interest in all other cases. Under paragraph 3 of the same article, such interest may be exempt if the interest is paid with respect to a bond, debenture, or other similar obligation of the Philippine government, or a political subdivision or a local authority of the Philippines, or with respect to a loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. Accordingly, the interest on the Loan to be paid by Investments Philippines to Investments Overseas pursuant to the Loan Agreement is 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-Netherlands tax treaty. (BIR Ruling No. 1-99 dated January 7, 1999; BIR Ruling No. DA-ITAD 107-07 dated November 16, 2007; BIR Ruling No. DA-ITAD 130-06 dated October 27, 2006; BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006; and BIR Ruling No. DA-ITAD 193-03 dated December 16, 2003.) The interest on the Loan cannot be subject to the lower rate of 10 percent because such interest is not paid with respect to the sale on credit of any industrial, commercial or scientific equipment, nor the Loan granted by a bank or a financial institution, nor the interest paid with respect to public issues of bonds, debentures, or similar obligations. Also, the interest on the Loan cannot be exempt since the borrower is not the Philippine government, or a political subdivision or a local authority of the Philippines, nor the Loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. AHSaTI B. On documentary stamp tax Finally, the Loan 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." 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 March 9, 1989, and effective January 1, 1992.