ITAD BIR Ruling No. 116-15

April 30, 2015 ITAD BIR RULING NO. 116-15 Article 11, Philippines-Finland tax treaty Smart Communications, Inc. Smart Tower, Ayala Avenue Makati City Attention : Ms. Rina R. Manuel Tax Department Head Gentlemen : This refers to your tax treaty relief application filed on March 7, 2011, requesting confirmation that interests payable by Smart Communications, Inc. ("Smart") to Finnish Export Credit Ltd. ("FECL") are exempt from Philippine income tax pursuant to Article 11 (7) (b) of the Convention between the Republic of the Philippines and the Republic of Finland for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Finland tax treaty"). It is represented that FECL is a wholly-owned subsidiary of Finnvera plc., a state-owned company within the administrative scope of the Ministry of Employment and the Economy in Finland and a resident thereof based on the Tax Residency Certificate issued by the Large Taxpayers' Office on December 13, 2012; that FECL is situated at Etelaesplanadi 8, P.O. Box 123, FIN-00131, Helsinki, Finland; that FECL is engaged in promoting and developing the financing of exports from Finland and granting export credits; that FECL is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission ("SEC") on February 26, 2013; and that, on the other hand, Smart is a domestic corporation situated at Smart Tower, Ayala Avenue, Makati City, Philippines. It is further represented that on August 19, 2011, FECL and Smart entered into a Loan Facility Agreement amounting to US$50,000,000.00; that Smart may request the making of an Advance on any banking day during the availability period (6 months from the date of the Agreement) and any part of the Facility undrawn at the end of the availability period shall be cancelled; that Smart shall repay the Loan by eight (8) equal successive half-yearly installments starting on the date which falls six (6) months after the Starting Point of Credit: that the rate of interest applicable to the loan or the relevant part thereof for each Interest Period shall be the rate per annum determined by the Facility Agent to be the aggregate of the London Inter-Bank Offer Rate (LIBOR) for the Interest Period and the Applicable Margin. It is finally represented that 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 the Sworn Statement issued by the Tax Department Head of Smart on March 19, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that interest to be paid to FECL, being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent, thus: "Section 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; xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such interest may be exempt from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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" Relative thereto, you invoke the Philippines-Finland tax treaty. Paragraphs 1, 2, 3, and 7, Article 11 thereof provide: " 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. xxx xxx xxx 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. xxx xxx xxx 7. Notwithstanding the provisions of paragraph 2, xxx xxx xxx b) interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Central Bank of the Philippines or the Finnish Export Credit Limited; (Underlying supplied) xxx xxx xxx" Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of Finland is subject to Philippine income tax at the rate of 15 percent of the gross amount of the interest. Under the succeeding paragraph 7 (b), notwithstanding paragraph 2, such interest is exempt from Philippine income tax if the interest is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Central Bank of the Philippines or the FECL. Accordingly, the interest payments payable by Smart to FECL is exempt from Philippine income tax pursuant to Article 11 (7) (b) of the Philippines-Finland tax treaty. 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