Poblador Bautista & Reyes

March 25, 2015 ITAD BIR RULING NO. 079-15 Article 11, Philippines-Japan tax treaty, as amended Poblador Bautista & Reyes Law Offices 5th Floor SEDCCO I Building 120 Rada corner Legaspi Streets Legaspi Village, Makati City Attention: Atty. Raymund Martin C. Rodriguez Gentlemen : This refers to your tax treaty relief filed on October 25, 2013 requesting confirmation that interest paid by FEP Real Estate, Inc. ("FEP Real Estate") to Funai Electric Co., Ltd. ("Funai Electric") is subject to income tax at the rate of 10 percent 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty, as amended"). Facts Funai Electric is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and its Certificate of Residence issued by the Kadoma Tax Office in Japan on September 26, 2013. Funai Electric is located at 7-7-1 Nakagaito, Daito City, Osaka, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on September 24, 2013, Funai Electric is not registered as a corporation or partnership in the Philippines. On the other hand, FEP Real Estate is a domestic corporation located at LG-21 Star Centrum Condominium corner Malugay Street, Sen. Gil Puyat Avenue, Makati City, Philippines. Based on the Secretary's Certificate issued by FEP Real Estate, Funai Electric , as of October 14, 2013, holds 39.33 percent of the total shares of stock of FEP Real Estate as described below: Stockholder Number and Value Mode of Percentage of of Shares Acquisition Ownership Funai Electric 118 By Purchase 39.33 percent (P118,000.00) On February 15, 2013, FEP Real Estate and Funai Electric entered into a Loan Agreement where Funai Electric granted FEP Real Estate a loan amounting $8,627,064.33. The loan bears interest at the rate of 3 percent per annum calculated on the basis of 360 days and a month of 30 days. The principal amount of the loan shall be paid in lump sum on March 31, 2023. The loan shall be automatically renewed for a further 10 years. To secure the loan, FEP Real Estate grants Funai Electric a security interest on the parcels of land located in Lima Technology Center, Lipa City, Batangas, which FEP Real Estate bought from the Bank of the Philippine Islands. In consideration, FEP Real Estate shall pay interest to Funai Electric on a quarterly basis as follows: Interest Payment Schedule June 30, 2013 US$74,766.00 Last day of September, US$64,702.00 December, March and June of each year thereafter On October 1, 2013, FEP Real Estate and Funai Electric amended the original agreement as to the interest payment date. FEP Real Estate and Funai Electric mutually agreed to change the date of first interest payment to begin on October 31, 2013 instead June 30, 2013 as stated on the original agreement. Details as follows: ISEHTa Interest Payment Schedule October 31, 2013 US$182,606.19 December 31, 2013 US$43,135.32 Last day of March, June, US$64,702.92 September and December of each year and thereafter up to March 31, 2013 Based on the Certificate of Inward Remittance issued by the Rizal Commercial Banking Corporation-Lima Business Center 2 on October 23, 2013, Funai Electric had remitted to FEP Real Estate's account the amount of $2,928,272.13 (P118,800,000.00) and $8,627,064.33 (P350,000,000.00) on February 15, 2013. Based on the Certification issued by Rizal Commercial Banking Corporation 3 on January 14, 2014, FEP Real Estate made remittances to Funai Electric as follows: Date of Amount Remittance Gross Amount (Net of Withholding Tax) November 4, 2013 $182,606.19 $164,345.58 December 27, 2013 $43,135.32 $38,821.79 Ruling In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest income earned by nonresidents foreign corporation. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In general. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). 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 Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." In this particular case, you invoke the Philippines-Japan tax treaty, as amended. Article 11 thereof provides: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. SHECcT 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States." Under Article 11, interest arising in the Philippines and paid to a resident of Japan, may be taxed in the Philippines at a rate not to exceed 10 percent. However, such interest is exempt if it is paid to 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. Moreover, the interest is exempt if it is paid to a resident of Japan with respect to debt-claims guaranteed, insured or indirectly financed by the said government, subdivision, authority, central bank or financial institution. Accordingly, since Funai Electric is a resident of Japan, such interest paid to it by FEP Real Estate shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. However, under Section 179 of the National Internal Revenue Code of 1997, as amended, the Loan Agreement, being a debt-instrument, is subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan (the peso equivalent of $8,627,064.33), to wit: "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." 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. 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 effective January 1, 2009. 2. Located at Lima Technology Center, Malvar, Batangas, Philippines. 3. Located at 46th Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave., Makati City.