ITAD BIR Ruling No. 089-15

March 25, 2015 ITAD BIR RULING NO. 089-15 Article 11, Philippines-Japan tax treaty, as amended First Sumiden Circuits, Inc., Ampere St., corner Main Avenue, LISPP 1, Bo. Diezmo, Cabuyao, Laguna Attention: Liz M. Fernandez Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 01 February 2013, requesting confirmation that the interest income earned by Sumitomo Electric Industries, Inc. ("Sumitomo-Japan") from a Loan Agreement entered into with First Sumiden Circuits, Inc. ("First Sumiden-Philippines") is subject to the preferential tax 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 1 ("Philippines-Japan tax treaty") . Basic Facts The facts, as represented, are as follows: Sumitomo-Japan is a non-resident foreign corporation organized and existing under the laws of Japan with business address at 4-5-33, Kitahama, Chuo-ku, Osaka, 541-0041 and is engaged in the business of developing, manufacturing, processing and selling various products such as electric wires and cables based on the consularized and notarized Residence Certificate issued by the Higashi Tax Office of Japan and the consularized and notarized Articles of Incorporation of Sumitomo-Japan . The company Sumitomo-Japan was previously licensed to do business as a corporation in the Philippines but its Certificate of Withdrawal of License was issued on 31 October 2012 based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on 11 December 2012. First Sumiden-Philippines is a domestic corporation with business address at Ampere St., corner Main Avenue, LISPP 1, Bo. Diezmo, Cabuyao, Laguna and is engaged in the business of marketing and distributing electronic parts. The company First Sumiden-Philippines is a PEZA-registered entity under Certificate of Registration No. 96-048. Sumitomo Electric Industries, Ltd.-Manila Representative Office ("Sumitomo-Manila") is a representative office of Sumitomo-Japan in the Philippines. The company Sumitomo-Manila is not a material factor in the realization of interest income because the Loan Agreement was entered into with First Sumiden-Philippines directly by Sumitomo-Japan based on the notarized Certification issued by the representative of Sumitomo-Manila , Mr. Katsuya Araoka. On 03 September 2012, Sumitomo-Japan and First Sumiden-Philippines entered into a Loan Agreement whereby Sumitomo-Japan undertakes to loan the amount of Twelve Million US Dollars (US$12,000,000.00) at the rate of 0.86% per annum to First Sumiden-Philippines to be fully paid by First Sumiden-Philippines on 04 September 2014 based on a notarized Loan Agreement . Per Loan Agreement , the terms of payment are as follows: Loan Date Loan Final Loan Rate Condition Day Count Amount Repayment Interest Rate Condition Fraction (US$) Date 05-Sep-12 12,000,000 04-Sep-14 0.86000 Fixed Deferred 360 days Payment Payment Principal (US$) Interest Total Payment Date Amount (US$) Amount of Balance Amount of Period Day Repayment Interest Covered (US$) 04-Mar-13 12,000,000 51,600 05-Sep-12 to 180 51,600 03-Mar-13 04-Sep-13 12,000,000 51,746 04-Mar-13 to 184 52,746 03-Sep-13 04-Mar-14 12,000,000 51,886 04-Sep-13 to 181 51,886 03-Mar-14 04-Sep-14 12,000,000 0 52,746 04-Mar-14 to 184 12,052,746 03-Sep-14 On 27 February 2013, First Sumiden-Philippines remitted the amount of US$46,440.00 as loan interest payment in favor of Sumitomo-Japan based on a notarized Certificate of Remittance issued by Bank of Tokyo-Mitsubishi UFJ, Manila Branch. DcSEHT As of the execution of the Loan Agreement , the total outstanding common shares of Sumitomo-Japan is Two Million Two Hundred Forty Nine Thousand Nine Hundred Ninety Three (2,249,993) shares or 99.9% of the total outstanding common shares, detailed as follows: Date of Issuance of Mode of Acquisition of Stock Number of Stock Certificate Shares Certificate Shares No. 05 July 1996 Subscription 002 943,493 05 September 1996 Assignment 014 2 05 September 1996 Assignment 017 1 11 March 1999 Subscription to additional 021 204,000 shares issued from the unissued capital stock 13 March 2012 Transfer from First 046 899,997 Philippine Electric Corporation 17 July 2012 Transfer from Sumitomo 049 202,500 Corporation (Manila Branch) Total Number of Shares 2,249,993 == = ===== based on notarized Certification from the Corporate Secretary of First Sumiden-Philippines. 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 a notarized Certification issued by Hisahiro Miyake, President of First Sumiden-Philippines on 27 November 2012. Ruling A. On Interest Payments In reply, please be informed that such interest paid to Sumitomo-Japan and all foreign corporations 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 ("NIRC of 1997") , 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. (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 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. xxx xxx xxx" In this case, paragraphs 1 to 7, Article 11 of the Philippines-Japan tax treaty provide as follows: "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. DcSTaC (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. (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. (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. (5) The provisions of paragraphs (1) and (2) above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. (6) Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political subdivision or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (7) Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." Based on the above provisions, interest arising in the Philippines and paid to a resident of Japan (1) may be taxed in the Philippines at a rate not to exceed ten percent (10%) of the gross amount of the interest; or (2) is exempt from tax if the interest is derived from public issues of bonds, debentures or similar obligations and paid by a company which is a resident of the Philippines to a resident of Japan. 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. TSIEAD Accordingly, since the interest arising from the Loan Agreement is not in respect of government securities, bonds or debentures at hand and since the interest is not paid to the Government of Japan, etc., such interest to be paid by First Sumiden-Philippines to Sumitomo-Japan in relation to the Loan Agreement is subject to income tax at the rate of 10 percent of the gross amount thereof. B. On documentary stamp tax Finally, the Loan Agreement , being a debt instrument, executed by First Sumiden-Philippines in favor of Sumitomo-Japan 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 Loan Agreement (BIR Ruling No. ITAD 167-11 dated 07 June 2011) . Section 179 of the Tax Code, as amended, provides: "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.