ITAD BIR Ruling No. 086-16

April 21, 2016 ITAD BIR RULING NO. 086-16 Article 11, Philippines-Japan tax treaty, as amended MG Exeo Network, Inc. Elizabeth Avenue, Sta. Ana Drive Barangay Sun Valley 1700 Paraaque City Attention: Yutaka Funaki President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 8, 2012, requesting confirmation that interest to be paid by MG Exeo Network, Inc. ("MG Exeo") to Kyowa Exeo Corporation ("Kyowa Exeo") 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 Kyowa Exeo , with address at 3-29-20 Shibuya, Shibuya-ku, Tokyo, 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 Residence Certificate issued by the District Director of Shibuya Tax Office dated October 24, 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 June 7, 2012; and that, on the other hand, MG Exeo is a corporation organized and existing under the laws of the Philippines with principal address at Elizabeth Avenue, Sta. Ana Drive, Barangay Sun Valley, Paraaque City; that per Certification issued on April 15, 2013 by the Corporate Secretary of MG Exeo , as of March 31, 2012, Kyowa Exeo holds 300,006 shares with MG Exeo which represents 40% shareholdings of the total outstanding shares of MG Exeo. It is further represented that on April 2, 2012, MG Exeo and Kyowa Exeo entered into a Loan Agreement ("Agreement") to make available to MG Exeo the loan up to but not exceeding One Hundred Thirty Million Pesos (P130,000,000.00), to be used to finance the latter's various projects with HUAWEI Technology Philippines and SMART Communications; that MG Exeo agrees to pay Kyowa Exeo a fixed interest at the rate of 2% per annum upon maturity on the Loan from the date of its release up to its maturity on April, 2015; that as proof of inward remittance issued by the Mizuho Corporate Bank, Ltd.-Manila branch dated April 2, 2012, the total amount of Three Million Forty-Eight Thousand Sixty-Five and 65/100 (USD3,048,065.65) were received by MG Exeo from Kyowa Exeo ; and that, based on a certified copy of telegraphic transfer of funds, the first payment of the interest was made by MG Exeo to Kyowa Exeo on January 7, 2013. cTDaEH It is finally represented 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 proceedings, or judicial appeal per the Affidavit issued by MG Exeo dated June 4, 2012. 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 such interest to be paid by MG Exeo to Kyowa Exeo , 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. Moreover, the subject Loan Agreement entered into between MG Exeo and Kyowa Exeo 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