ITAD BIR Ruling No. 084-15

March 25, 2015 ITAD BIR RULING NO. 084-15 Article 11, Philippines-Japan tax treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on December 7, 2012 on behalf of IBJ Leasing Co., Ltd. ("IBJ") , requesting confirmation that interest payments of Japan PNB Leasing & Finance Corporation ("Japan PNB") to IBJ are subject to the preferential withholding tax rate of 10 percent pursuant to Article 11 of the amended 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") . It is represented that IBJ, with address at 1-2-6, Toranomon, Minato-ku, Tokyo 105-0001, Japan, is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty per the Certificate of Status of Taxable Person issued by the District Director of Shiba Tax Office dated June 22, 2012; that it is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 13, 2012; that, on the other hand, Japan PNB is a corporation organized and existing under the laws of the Philippines, with principal address at 7th Floor, Salustiana D. Ty Tower 104, Paseo de Roxas, Makati City; and that, based on the Secretary's Certificate issued by Japan PNB dated July 26, 2013, as of year 2012, IBJ owns 150,000 common shares, which represents 10% ownership in Japan PNB. It is further represented that IBJ and Japan PNB entered into four (4) different Loan Agreements ("Agreements") with the following details: Date of Agreement Loan Amount Interest Rate June 29, 2012 US$2,414,225 3.22% per annum June 29, 2012 US$99,015 2.80% per annum November 10, 2012 US$86,196 3.92% per annum November 27, 2012 US$627,316.00 5.80% per annum That the Agreements shall terminate when all indebtedness therein have been fully and finally paid; that the purpose of the loan under the Agreements is for financing the purchase of Equipment of IBJ. It is finally represented, based on the Certification issued by Japan PNB on December 6, 2012, that the transaction subject of the request for 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 of the taxpayer/s involved. EaHcDS 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. (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." Thus, Article 11 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. It states: "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. xxx xxx xxx 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." Based on the above provisions, interest derived by a corporation which is a resident of Japan may qualify for a preferential rate of 10 percent of the gross amount thereof, under the Philippines-Japan tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. In view thereof, and considering that IBJ has no fixed place of business in the Philippines to which the subject interests are effectively connected and considering that IBJ is the beneficial owner of the said interest, this Office is of the opinion and so holds that such interests to be paid by Japan PNB to IBJ, are subject to Philippine income tax at a reduced rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. ETIDaH Moreover, the subject Agreements entered into between IBJ and Japan PNB are 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