ITAD BIR Ruling No. 071-13

March 15, 2013 ITAD BIR RULING NO. 071-13 Article 12, Philippines-US tax treaty Carmen Copper Corporation 7th Floor Quad Alpha Centrum 125 Pioneer Street, Mandaluyong Attention: Mr. Adrian Paulion S. Ramos Vice President Gentlemen : This refers to your tax treaty relief application filed on April 13, 2012, requesting confirmation that the interest payments by Carmen Copper Corporation ("CCC") to Bank of New York Mellon ("Bank NYM") are subject to preferential tax rate of ten percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income. ("Philippines-USA tax treaty") . It is represented that Bank NYM is a corporation duly organized and existing under the laws of the United States of America and a resident thereof based on the Certificate of Residency issued by the Field Director, Accounts Management of Philadelphia, USA on March 19, 2012 with principal office address at One Wall Street, New York, New York based on its Certificate of Incorporation; that Bank NYM was licensed to establish a representative office in the Philippines on June 28, 1991 and that no petition for the withdrawal or cancellation of its license has been filed based on the Certification of Corporate Filing/Information issued by the Securities and Exchange Commission on April 13, 2012; and that on the other hand, CCC is a domestic corporation with address at the 7th Floor Quad Alpha Centrum, 125 Pioneer Street, Mandaluyong City. It is further represented that on March 16, 2012, Bank NYM and CCC entered into an Indenture ,whereby Bank of NYM acts as the Trustee; that CCC has duly authorized the execution and delivery of the Indenture to provide for the issuance of up to US$300,000,000 aggregate principal amount of Bank of NYM' s 6.50% Senior Notes due 2017 and, if and when issued, any additional notes as provided therein; that interests shall be paid every March 21 and September 21 of each year, commencing on September 21, 2012, details as follows: Date Particulars Amount (in USD '000) 9/21/2012 1st semi-annual interest 10,097.26 3/21/2013 2nd semi-annual interest 9,669.86 9/21/2013 3rd semi-annual interest 9,830.14 3/21/2014 4th semi-annual interest 9,669.86 9/21/2014 5th semi-annual interest 9,830.14 3/21/2015 6th semi-annual interest 9,669.86 9/21/2015 7th semi-annual interest 9,830.14 3/21/2016 8th semi-annual interest 9,723.29 9/21/2016 9th semi-annual interest 9,830.14 3/21/2017 10th semi-annual interest 9,669.86 Total 97,820.55 ======== that the first payment of the interest was made by CCC to Bank of NYM on September 26, 2012 in the amount of USD270,873.33 based on the Certificate issued by the Chief Financial Officer of CCC on October 25, 2012 duly supported by a copy of the Telegraphic Transfer Form issued by Banco de Oro on September 26, 2012; that Bank of NYM Manila Representative Office is not a party to the Indenture, nor are the foregoing interest payments connected therewith based on the Certification issued by the representative office of Bank of NYM on June 21, 2012. CScTDE It is finally represented that the interest subject of this 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, based on the Sworn Statement issued by the Vice President of CCC on April 11, 2012. In reply, please be informed that such interest paid to Bank of NYM, a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent. Section 28 (B) (5) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, 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; xxx xxx xxx" However, such interest 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" In this particular case, you invoke the Philippines-USA tax treaty. Paragraphs 1 to 5, Article 11 thereof provide as follows: DHITCc "Article 12 Interest 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. xxx xxx xxx 5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State 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 a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services),as the case may be, shall apply. xxx xxx xxx 7. The term "interest" as used in this Convention 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, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." (emphasis supplied) In connection with the above-quoted provisions, Article 5 of the Philippines-USA tax treaty provides: "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. 2. The term "fixed place of business " includes but is not limited to. a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse; h) A mine, quarry, or other place of extraction of natural resources; IAEcCT i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx" Based on the above provisions, for purposes of applying the 15 percent preferential rate, the recipient of the interest income should be the beneficial owner thereof. However, the preferential rate will not apply if the recipient of the interest carries on trade or business in the Philippines through a permanent establishment and the interest is effectively connected with such. However, since Bank of NYM has a representative office in the Philippines, this constitutes a permanent establishment under paragraphs 1 and 2, Article 5 of the treaty. Nonetheless, under Article 7 of the treaty, service fees paid to Bank of NYM may be taxed in the Philippines only if these fees are attributable to the said establishment. Relative thereto, the Supreme Court, in Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), ruled that the taxation of income derived by a foreign corporation which has a branch office in the Philippines will be taxed as income of the branch office only if the business transaction that gives rise to the income has been conducted by the foreign corporation through the branch office ,to wit: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. " (Emphasis added) Accordingly, we do not consider the payments made by CCC to Bank of NYM as attributable to its representative office in the Philippines it having been represented that the interests are not effectively connected therewith based on the Sworn Statement issued by the Country Executive of the Philippine Representative Office of the Bank of NYM on June 21, 2012. In this case, notwithstanding the presence of Bank of NYM' s representative office in the Philippines, the interest payments to be remitted by CCC to Bank of NYM are still subject to the preferential tax rate of 15 percent (15%) pursuant to Article 12 of the Philippines-US tax treaty. Finally, the Indenture ,being a debt instrument, between Bank of NYM and CCC is subject to documentary stamp tax equivalent to P1.00 for every P200.00, or fractional part thereof, of the issue price or the amount subject of the Note. Section 179 of the Tax Code, as amended, 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 a fractional part thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ration of its term in number of days to three hundred sixty-five days, provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" 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