ITAD BIR Ruling No. 118-16

June 29, 2016 ITAD BIR RULING NO. 118-16 Article 10, Philippines-Japan tax treaty; BIR Ruling ITAD No. 239-12 Manabat Sanagustin & Co. The KMPG Center, 9/F 6787 Ayala Avenue Makati City 116 Metro Manila, Philippines Attention: Maria Carmela M. Peralta Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") received by this Office on 26 September 2011 on behalf of your client Energy Development Corporation ("EDC"), requesting confirmation that Interest Payments made by EDC to the Hong Kong branch of The Bank of Tokyo-Mitsubishi UFJ Ltd. ("Bank of Tokyo") are subject to ten percent (10%) preferential tax rate, pursuant to Article 11 of 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 as amended ("Philippines-Japan tax treaty") . Facts It is represented that Bank of Tokyo with address at 2-7-1, Marunouchi 2-chrome, Chiyoda-ku, Tokyo 100-8388 is a company organized and existing under the laws of Japan, and is a resident thereof within the meaning of Article 4 of the Philippines-Japan tax treaty as evidenced by a Certification of Residence issued by the District Director of Kojimachi Tax Office of Japan on 12 August 2011; that it is not registered as a corporation or partnership in the Philippines per Certification of Non-registration of Company issued by the Philippines Securities and Exchange Commission on 22 September 2011; and that EDC, on the other hand, is a corporation organized and existing under the laws of the Philippines with principal address at Energy Center Meritt Road, Fort Bonifacio, Taguig City. It is further represented that on 17 June 2011, EDC entered into a Credit Agreement ("Agreement") with a number of lenders for a total amount of US$175,000,000.00, and one of the lenders is Bank of Tokyo ; that under the Agreement, Bank of Tokyo committed to lend US$23,500,000.00 to EDC; 1 that EDC has requested the utilization of the full US$175,000,000.00, which has been applied by the facility agent of the Agreement to a previous loan obligation of EDC; that the term of the loan is three (3) months and interest is payable on 27 September 2011; and that the interest rate is equal to the aggregate of the margin (1.75%) as defined in the Agreement and the London Interbank Offer Rate (LIBOR). It is also shown from the documents submitted that the Bank of Tokyo has a permanent establishment in the Philippines named as Bank of Tokyo-Mitsubishi UFJ Ltd.-Manila Branch ("Bank of Tokyo-Manila branch") as declared in BIR Form No. 0901-I by its representative; and that the Executive Vice-President of the Bank of Tokyo declared under oath on 22 September 2011 that the Agreement was entered into by Bank of Tokyo in its own capacity and the rights and obligations arising therefrom are for its sole account and independent of Bank of Tokyo-Manila branch , and that Bank of Tokyo will receive interest payments and will not be coursed through Bank of Tokyo-Manila branch . Moreover, in a notarized certification issued by the Senior Vice-President and Chief Financial Offices of Energy Development Corporation dated 17 August 2012 the interest subject of this ruling is paid on 27 September 2011, as evidenced by the attached Cable Confirmation from Union Bank dated 14 August 2011. It is finally represented, per the Certification issued on 19 September 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 proceeding or judicial appeal. Ruling In reply, please be informed that interest income derived by a nonresident foreign corporation 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 . (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; However, said income may be exempt from income tax 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." Thus, Article 11 of the Philippines-Japan tax treaty , which you invoke, may apply to the instant case. It states: "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. xxx xxx xxx 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." Based on the above provisions, interest derived by a corporation which is a resident of Japan may qualify for a preferential rate of ten percent (10%) of the gross amount thereof, under the Philippines-Japan tax treaty , the recipient of such interest is also the beneficial owner thereof. However, the ten percent (10%) 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 although, Bank of Tokyo has a permanent establishment (Bank of Tokyo-Manila branch) in the Philippines, it is shown that the subject interest payments are not effectively connected with the said permanent establishment, this Office is of the opinion and so holds that the interests derived by Bank of Tokyo from EDC under the Agreement are subject to Philippine income tax at the rate of ten percent (10%) of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty , as amended (ITAD BIR Ruling No. 239-12, June 6, 2012). Finally, the Credit Agreement is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Credit Agreement, 17 June 2011. Schedule 1 Original Parties, page 89.