ITAD BIR Ruling No. 107-15

April 1, 2015 ITAD BIR RULING NO. 107-15 Article 11 (Interest), Philippines-Malaysia tax treaty Petron Corporation SMC Head Office Complex 40 San Miguel Avenue Mandaluyong City Attention: Mr. Joel Angelo C. Cruz Assistant Vice President General Counsel and Corporate Secretary Gentlemen : This refers to your tax treaty relief application filed on December 28, 2011 requesting confirmation that interest paid by Petron Corporation ("Petron") to Maybank International (L) Ltd. ("Maybank") is subject to preferential tax rate of 15 percent pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Malaysia tax treaty") . Facts It is represented that Maybank is a corporation organized and existing under the laws of Malaysia and a resident thereof based on the company's amended Memorandum of Association and amended Articles of Association and Certificate of Status of Tax Residence issued by the Inland Revenue Board of Malaysia on October 12, 2010; that Maybank is situated at Level 16 (B), Main Office Tower, Financial Park Labuan, Jalan Merdeka, 87000 Wilayah Persekutuan, Labuan, Malaysia; that the company's objectives are to carry on exclusively and solely the business of offshore banking, to receive deposits and provide credit facilities in any currency, and to provide, effect, insure, guarantee, underwrite, participate in managing and carrying out any issue, public or private loans or of shares, stocks, debentures or debenture stock of any business enterprise and to lend money for the purpose of any such issue; that Maybank 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 January 11, 2012; that, on the other hand, Petron is a corporation organized and existing under the Philippines and situated at SMC Head Office Complex, 40 San Miguel Avenue, Mandaluyong City, Philippines; that Petron 's main business activity is the refining and marketing of petroleum products in the Philippines including gasoline, diesel, liquefied petroleum gas (LPG), jet fuel, kerosene, industrial fuel oil, and petrochemical feedstock benzene, toluene, mixed xylene, and propylene. It is also represented based on the certification issued by Petron on March 19, 2012 that Maybank does not hold any shares of stock in the company. AEHCDa It is further represented that on September 30, 2011, Petron entered into a Loan Facility Agreement with Maybank among other financial institutions (as lenders) where they committed to grant Petron a loan facility amounting 480 million US dollars, and where Petron 's commitment is 60 million US dollars; that the loan will used to finance the completion of the Refinery Master Plan Phase 2 located in Petron 's Bataan Refinery, with project cost of 2 billion US dollars; that Petron will complete and submit a utilization request to Maybank to avail the facility on the former's intended drawdown date; that the loan bears interest at a period of one, three or six months as Petron opted in its request; that the interest is a floating interest equal to the applicable LIBOR (London Interbank Offered Rate) plus a margin of 2.35 percent per annum; and that based on the Certificate of Inward Remittance issued by Citibank N.A. Manila 1 on March 2, 2012 and January 26, 2012, Petron received inward remittances totaling 480 million US dollars: 400 million on February 15, 2012 and 80 million on November 25, 2011, which were subsequently credited to Petron 's account on those dates. 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 loans derived by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 20 percent: "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 interest is 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." In this regard, paragraphs 1 and 2, Article 11 of the Philippines-Malaysia tax treaty provides relief to interest arising in the Philippines and paid to a resident of Malaysia: "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. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest." Under this article, such interest is subject to income tax at a rate not to exceed 15 percent. HAcaCS Accordingly, interest paid by Petron to Maybank under the Loan Facility Agreement is subject to income tax at the rate of 15 percent pursuant to paragraph 2, Article 11 of the Philippines-Malaysia tax treaty. Furthermore, under Section 179 of the Tax Code, as debt-instrument, each utilization request completed and submitted by Petron to Maybank and the other lending financial institutions pursuant the Loan Facility Agreement is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the loaned amount indicated in the request: "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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at 8741 Paseo de Roxas, Makati City, Philippines.