ITAD BIR Ruling No. 084-14

June 17, 2014 ITAD BIR RULING NO. 084-14 Article 11, Philippines-Japan tax treaty, as amended Solutions Using Renewable Energy, Inc. (SURE) 602 OMM-Citra Building San Miguel Avenue Ortigas Center, Pasig City Attention: Mr. Jezreel Pabia-Uy Finance Manager Gentlemen : This refers to your tax treaty relief application filed on June 1, 2011 requesting confirmation that the interests to be paid by Solutions Using Renewable Energy, Inc. ("SUREPEP") to MG Leasing Corporation ("MGLC") are subject to a 10 percent preferential tax rate 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") , as amended by a Protocol . 1 It is represented that MGLC is a non-resident foreign corporation organized and existing under the laws of Japan with principal office address at 2-1-1, Hitotsubashi, Chiyoda-ku, Tokyo, Japan, as evidenced by its Articles of Incorporation and Certificate of Residence dated March 29, 2011; that MGLC is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission ("SEC") on June 7, 2011; that SUREPEP, on the other hand, is a domestic corporation with principal business address at Unit 602 OMM-Citra Building, San Miguel Avenue Ortigas Center, Pasig City. It is further represented that on September 24, 2010, MGLC and SUREPEP entered into a Payment Assignment Agreement for the Facility of USD2,000,000.00 ("Agreement") whereby MGLC will provide a facility in the principal amount of USD2,000,000.00 to SUREPEP, in the form of a "Payment Assignment" to enable the latter to build and develop for Pepsi-Cola Products Philippines, Inc. a waste to energy facility in a combined heat and power facility at Rosario, La Union under the Build, Own, Operate, Supply and Transfer ("BOOST") Scheme; that for and in consideration of the same, SUREPEP shall pay MGLC based on the following payment schedule: HSAcaE Notice No.: 9/30/2010 Advance Amount: US$2,000,000.00 Applicable Interest Rate: 8.344% Applicable SWAP Rate: 3.010% (December 28, 2010) Interest Margin: 4.500% p.a. 7.510% p.a. Including withholding tax 8.344% p.a. Repayment Principal Principal Interest Withholding Repayment Interest Date Balance Amount Tax (10%) Amount Period Outstanding (inc. tax) (Days) 6/30/2011 2,000,000.00 83908.02 8390.80 75517.22 181 12/31/2011 2,000,000.00 85298.76 8529.88 76768.88 184 6/30/2012 2,000,000.00 84371.60 8437.16 75934.44 182 12/31/2012 1,833,333.33 166,666.67 85298.76 8529.88 243435.55 184 6/30/2013 1666666.66 166,666.67 76915.68 7691.57 235890.78 181 12/31/2013 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 Legal Counsel of SUREPEP on May 14, 2011. A. On interest payments In reply, please be informed that such interest paid to MGLC, 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 . IcESDA (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-Japan tax treaty. Paragraphs 1 to 5, Article 11 thereof provide as follows: "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. HCDaAS 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: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases . 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, 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 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: IHTASa a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development 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. 5. 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. (underscoring supplied) xxx xxx xxx" The Protocol amended and renumbered the foregoing paragraphs and now read: "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. TEcCHD 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. xxx xxx xxx 4. 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." aHCSTD Based on the above provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed: (a) before January 1, 2009, 10 percent if the interest is paid in respect of government securities, bonds or debentures, or if the interest is paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and 15 percent of the gross amount of the interest in all other cases; and (b) beginning January 1, 2009, 10 percent. Further, such interest is exempt from income tax if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, or by a resident of Japan under certain conditions. The term interest 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. Accordingly, since the interest arising from the Agreement is not in respect of government securities, bonds or debentures at hand, and since SUREPEP is not registered with the Board of Investments as such, and since the interest is not paid to the Government of Japan, etc., such interest to be paid by SUREPEP to MGLC in relation to the Agreement is subject to income tax at the rate of 10 percent of the gross amount thereof. B. On documentary stamp tax Finally, the Agreement, being a debt instrument, executed by SUREPEP in favor of MGLC 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: cACEaI "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 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.