ITAD BIR Ruling No. 090-14

June 19, 2014 ITAD BIR RULING NO. 090-14 Article 11, Philippines-Japan tax treaty, as amended Ides Corporation 16th Floor, Oledan Square 6788 Ayala Avenue Makati City Attention: Mr. Masayoshi Ito President Gentlemen : This refers to your tax treaty relief application filed on January 26, 2010 requesting confirmation that interest paid by Ides Corporation ("Ides") to Dowa Eco-System Company Ltd. ("Dowa Eco-System") 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 ("Philippines-Japan tax treaty") , as amended by Protocol 1 effective January 1, 2009 . Facts Dowa Eco-System is a foreign corporation and a resident of Japan based on its Residence Certificate issued by the Kanda Tax Office in Japan on March 5, 2010. Dowa Eco-System is situated at 14-1 Sotokanda 4-chome, Chiyoda-ku, Tokyo, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 26, 2010. On the other hand, Ides is a domestic corporation situated at 16th Floor, Oledan Square, 6788 Ayala Avenue, Makati City, Philippines. On April 10, 2009, Ides and Dowa Eco-System entered into a Loan Agreement where Dowa Eco-System granted Ides a loan of $1,225,000.00. The loan will be drawn on April 17, 2009 and will mature on April 17, 2014. The loan bears a floating rate of interest at six-month US dollar LIBOR (London Interbank Offer Rate) as set by the Bank of Tokyo-Mitsubishi UFJ plus a margin of 1.3 percent per annum. The loan is also subject to a default interest (or penalty for late payment) equivalent to the applicable interest rate on the loan plus a margin of 2 percent per annum. Based on a computer generated advice of payment issued by Standard Chartered Bank 2 on April 20, 2009, the loan amounting $1,225,000.00 was remitted and credited to the account of Ides on that date. SEDICa The loan will be repaid as follows: Date of Payment Principal Principal Subject to Interest October 17, 2009 - US$1,225,000.00 April 17, 2010 - 1,225,000.00 October 17, 2010 - 1,225,000.00 April 14, 2011 US$175,000.00 1,225,000.00 October 14, 2011 175,000.00 1,050,000.00 April 16, 2012 175,000.00 875,000.00 October 16, 2012 175,000.00 700,000.00 April 16, 2013 175,000.00 525,000.00 October 16, 2013 175,000.00 350,000.00 April 14, 2014 175,000.00 175,000.00 Ruling In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , interest on foreign loans paid to a foreign corporation not engaged in trade or business is subject to income tax at the rate of 20 percent, thus: aScIAC "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (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 income may be 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." For this purpose, paragraphs 1 and 2, Article 11 of the Philippines-Japan tax treaty, as amended, provides relief to interest paid to a resident of Japan, to wit: AaHcIT "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." Under this article said interest is subject to a reduced rate of income of 10 percent in all cases. Accordingly, interest paid by Ides to Dowa Eco-System (including interest or penalty on late payment) is subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. Finally, under Section 179 of the Tax Code, the Loan Agreement, being a debt-instrument, is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the peso equivalent of the loan, 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. AcEIHC 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 . 2. Located at Makati Sky Plaza Building, 6788 Ayala Avenue, Makati City, Philippines.