ITAD BIR Ruling No. 116-12

March 8, 2012 ITAD BIR RULING NO. 116-12 Article 11, Philippines-Germany tax treaty; BIR Ruling No. ITAD-15-09 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mark Anthony P. Tamayo Partner, Tax & Customs Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on May 30, 2011, on behalf of Henkel AG & Co. KGaA ("Henkel-Germany"), requesting for a ruling that the interest payments of Henkel Philippines, Inc. ("Henkel-Phil.") to Henkel-Germany are subject to the 15 percent preferential tax rate, pursuant to Article 11 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that Henkel-Germany, with principal address at Henkelstrasse 67, 40589 Duesseldorf, Federal Republic of Germany, is a resident of Germany within the meaning of the Philippines-Germany tax treaty per the Certificate of Residence issued by the German Tax Administration on October 8, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated February 18, 2011; and that, on the other hand, Henkel-Phil. is corporation organized and existing under the laws of the Philippines with principal address at 2F Unit 202 Alabang Business Tower, Acacia Avenue, Madrigal Business Park, Ayala Alabang, Muntinlupa City, Philippines. It is further represented that on June 15, 2010, a Loan Agreement was entered into by and between Henkel-Phil.,as the Borrower, and Henkel-Germany, as the Lender, whereby Henkel-Germany has agreed to make available to Henkel-Phil. a loan in the amount of Three Hundred and Sixty-four Million Five Hundred and Sixty-three Thousand Four Hundred and Fifty-Eight and Forty-three Pesos (PHP364,563,458.43) as payment for the acquisition cost of the shares of stock or net assets of Inter-National Starch & Chemical Co.,Inc. amounting to 5,316,404.00 sterling pounds which Henkel-Germany has paid on Henkel-Phil.'s behalf; that pursuant to the agreement, the loan will be made available to Henkel-Phil. on June 6, 2010, the "Date of Drawdown",and shall be paid by Henkel-Phil. on June 14, 2012, the "Repayment Date",unless the loan is extended by Henkel-Germany in writing or by electronic transmission; and that interest at 4.8233% per annum shall be paid to Henkel-Germany every six (6) months. aHTDAc It is finally represented, per Sworn Statement issued by Henkel-Phil. on May 27, 2011, that the issue or transaction subject of this request for 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. In reply, please be informed that interest income derived by a nonresident foreign corporation in the Philippines 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. 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, said interest income may be exempt 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. ECTIHa xxx xxx xxx" Thus, Article 11 of the Philippines-Germany tax treaty which you invoked may apply to the instant case. It states: "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 law of that State, but the tax so charged shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of such interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply. 4. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of the other Contracting State as by 'Hermes Deckung' in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. ICacDE xxx xxx xxx" Under paragraph 2, interest arising in the Philippines and derived by a resident of Germany is subject to income tax at a rate not to exceed: (a) 10 percent of the gross amount of the interest if it is paid (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations; and (b) 15 percent of the gross amount of the interest in all other cases. However, under paragraphs 3 and 4, such interest is exempt from income tax if the interest is paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau, or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft),or if the interest is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of Germany such as 'Hermes Deckung' or by any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Philippines and Germany. In view thereof, such interest payments of Henkel-Phil. to Henkel-Germany pursuant to the Loan Agreement are subject to income tax at the rate of 15 percent based on the gross amount thereof pursuant to Article 11 of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD-15-09 dated May 18, 2009) Moreover, the Loan Agreement entered into by Henkel-Phil. with Henkel-Germany 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 amount drawdown. 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. ITSaHC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue