ITAD BIR Ruling No. 115-11

April 11, 2011 ITAD BIR RULING NO. 115-11 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 022-10; BIR Ruling No. ITAD 014-10 Ina Research Philippines, Inc. Phase 2 Block 7 Lot 1-A-1 Technology Avenue, Laguna Technopark Bian, Laguna 4024, Philippines Attention: Lisa M. Lalap-Siman Acctg. & Finance Section Chief Hiroyoshi Ishiguro Finance Director Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on February 10, 2011 on behalf of Ina Research, Inc. ("IRI") requesting for a ruling that the interest payments of Ina Research Phils., Inc. ("INARP") to IRI 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") . AICDSa Basic Facts It is represented that IRI is a corporation organized and existing under the laws of Japan per its Corporate Registration; that IRI has its principal place of business at 2148-188 Nishiminowa Ina-shi, Nagano, Japan; that IRI is a resident of Japan within the meaning of the Philippines-Japan tax treaty as certified by Kiyoshi Kiyosawa, the District Director of INA Tax Office, on October 29, 2010; that IRI is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission ("SEC") on November 17, 2010; that, on the other hand, INARP is a corporation duly organized and existing under the laws of the Philippines with principal office at Lot 1-A-1, Phase 2, Blk. 7, Technology Avenue, Laguna Technopark, Bian, Laguna; and that, as per certification issued by the Corporate Secretary of INARP, IRI holds 1,889,995 out of 1,890,000 shares of INARP. It is further represented that on June 29, 2010, IRI and INARP entered into an International Loan Contract for the amount of 12,500,000.00 with an interest of 2.80% per annum payable in installments from July 2010 to March 2016 or for a term of 5 years and 9 months; that the purpose of the Loan is to provide the "funds for the renovation of INARP for clinical trial facility"; and that based on the Bank Certification with Reference No. 2010-044 issued on November 09, 2010 by Rizal Commercial Banking Corporation ("RCBC"), Laguna Technopark Branch, INARP has an inward remittance amounting to 12,500,000.00 from IRI on July 22, 2010. It is finally represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the President of INARP dated October 28, 2010. Ruling In reply, please be informed that a foreign corporation like IRI, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this case, since IRI is a resident of Japan for tax treaty purposes and is not engaged in trade or business in the Philippines based on the Certification of Non-Registration of Company issued by the SEC on November 17, 2010, such interest derived by IRI in the Philippines is generally subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the Tax Code of 1997, which states: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (F) 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; DAETHc xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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." Hence, the provisions of Article 11 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. It provides: "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. . . ." Based on the above provisions, interest on foreign loans are generally taxable in the Philippines at the rate of 20 percent. However, interests 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 of the foregoing, and considering that IRI, as represented, has no permanent establishment in the Philippines to which the subject interests are effectively connected, this Office is of the opinion and so holds that the interests derived by IRI from INARP under the International Loan Contract are subject to Philippine income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended by Article IV of the new protocol (BIR Ruling No. 022-10 dated August 25, 2010 and BIR Ruling No. ITAD 014-10 dated July 1, 2010) . Finally, the International Loan Contract is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 1 at the rate of one peso (PHP1.00) on each two hundred pesos (PHP200.00) or fractional part thereof, of the issue price of the contract. 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. DaEATc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Entitled "An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for other Purposes," signed into law on February 17, 2004, and effective March 20, 2004.