ITAD BIR Ruling No. 074-13

March 15, 2013 ITAD BIR RULING NO. 074-13 Article 11, Philippines-Singapore Tax Treaty AES Philippines Power Partners Co., Ltd. 12th Floor, Picadilly Star Building 4th Avenue corner 27th Street Bonifacio Global City, Taguig Attention: Moazzam Nazir Chanda Vice President-Finance Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 24, 2012, requesting confirmation that the interests to be paid to AES Transpower Pte., Ltd. ("AES-Singapore") by AES Philippines Power Partners Co., Ltd. ("AES-Phil") are subject to 15 percent final withholding tax rate under Article 11 of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that AES-Singapore is a corporation organized and existing under the laws of Singapore and is a resident thereof, having its registered address at 7 Temasek Boulevard, #09-01 Singapore 038987, based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore dated April 4, 2012; that it is not registered either as a corporation or as a partnership in the Philippines per the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 18, 2012; and that, on the other hand, AES-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at 12th Floor, Picadilly Star Building, 4th Avenue corner 27th Street, Bonifacio Global City, Taguig. It is further represented that on March 20, 2012, AES-Singapore and AES-Phil entered into an Inter-Company Loan Agreement ("Agreement") , whereby AES-Singapore extended a loan to AES-Phil amounting to USD1,900,000; that the loan maturity date will be on March 19, 2015 with an annual interest rate of 0.25%; and that, the interest and principal due and payable in accordance with the terms under the Agreement shall be paid in full not later than the loan maturity date; and that per the certificate of inward remittance issued by The Hongkong and Shanghai Banking Corporation Limited, a total amount of USD1,000,000.00 were remitted to AES-Phil on March 21, 2012. THSaEC It is finally represented, per the Sworn Statement issued by AES-Phil dated April 18, 2012, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. 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." SIcCEA Thus, Article 11 of the Philippines-Singapore tax treaty, 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 be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. xxx xxx xxx" Based on the above provisions, interest derived by a corporation which is a resident of Singapore may qualify for a preferential rate of 15 percent of the gross amount thereof under the Philippines-Singapore tax treaty, if the recipient of such interest is also the beneficial owner thereof. However, the 15 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. CSTEHI In view of the foregoing, and considering that AES-Singapore does not have permanent establishment in the Philippines to which the subject interests are effectively connected, this Office is of the opinion and so holds that the interests to be paid by AES-Phil to AES-Singapore are subject to Philippine income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Singapore tax treaty. Moreover, the subject Agreement entered into between AES-Phil and AES-Singapore is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, 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