ITAD BIR Ruling No. 119-15

April 30, 2015 ITAD BIR RULING NO. 119-15 Article 11 (4) (ii) (b), Philippines-Korea tax treaty KEPCO Philippines Corporation 18th Floor, Citibank Tower 8741 Paseo De Roxas Makati City 1227 Attention: Jun-In Kim Treasurer Gentlemen : This refers to your tax treaty relief application filed on May 26, 2008, requesting confirmation that the Export-Import Bank of Korea ("K-EXIM") is exempt from all income taxes in the Philippines on interests paid to it by KEPCO SPC Power Corporation ("KEPCO SPC") under a Loan Agreement pursuant to Article 11 (4) (ii) (b) of the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to taxes on Income (" Philippines-Korea tax treaty "). It is represented that K-EXIM is a statutory juridical financing institution organized and existing under the laws of Korea with office address at 16-1 Yoido-Dong, Yeongdeungpo-Gu, Seoul 150-996, Korea; that KEPCO SPC is a corporation organized and existing under the laws of the Philippines with office address at 7th Floor, Cebu Holdings Center, Cebu Business Park, Cebu City. It is further represented that on January 3, 2008, KEPCO SPC and K-EXIM entered into a Loan Facility Agreement ( "Agreement" ) for an aggregate principal amount of US$100,000,000; that under the Agreement, the proceeds of the loan shall be used exclusively for financing the project 1 before the first drawdown of the Project Loan; 2 that KEPCO SPC shall, on each Interest Payment Date, pay interest on the Loan for each Interest Period at the rate per annum equal to the sum of the Margin and three (3) month LIBOR, 3 provided, however, that the relevant Interest Period is less than three (3) months, the sum of Margin and LIBOR for the period nearest to such Interest Period shall be applicable. It is finally represented, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal, per certification issued by KEPCO SPC dated May 20, 2008. In reply, please be informed that Section 28 (B) (5) of the National Internal Revenue Code ("Tax Code") of 1997, as amended applies in general to interest received by a nonresident foreign corporation. 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, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income . (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: (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, the provisions of Article 11 (4) (ii) (b) of the Philippines-Korea tax treaty, which you invoked, may apply to the instant case. It reads: "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 also be taxed in the Contracting State in which it arise, 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: a) 10 percent of the gross amount of the interest if the interest is paid in respect of public issues of bonds, debentures or similar obligation; and b) 15 percent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 hereof, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Korea, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraph 2 hereof, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if the interest is paid in respect of: (i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (a) in the case of the Philippines, the Central Bank of the Philippines, (b) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank and (c) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Contracting States. 5. 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 laws of the State in which the income arises, including interest on deferred payment sales. " (underscoring supplied) Based on the foregoing, interest arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not exceeding 10% if the interest is paid in respect of public issues of bonds, debentures or similar obligations, or if the company paying such interest is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investments under the investment incentive laws of the Philippines; or 15% in all other cases. On the other hand, such interest is not subject to Philippine income tax if the same is paid in respect of a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or when the same is paid on a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (1) in the case of the Philippines, the Central Bank of the Philippines, (2) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea , the Korea Exchange Bank and (3) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Philippines and Korea. Such being the case, interest income received by K-EXIM from its Agreement with KEPCO SPC is exempt from Philippine income tax. However, the Agreement entered into by and between KEPCO SPC and K-EXIM is subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 4 at a rate of one peso (P1.00) for each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. 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. Project means the development and construction, ownership, operation, maintenance and financing of a 2 x 100MW CFBC boiler coal-fired base load power plant located at Municipality of Naga, Cebu Province in Philippines. 2. Project Loan means the term loan to be obtained by the borrower for the Project by way of Project Financing. 3. LIBOR means, for each Interest Period, the interbank offered rate for the three month deposits in U.S. dollars that appears on Telerate Page 3750 (or such successor page) of the Reuter Monitor Money Rates Service as of approximately 11:00 a.m., London time, on the second preceding London Banking Day of the commencement of the relevant Interest Periods. If such quote is not available on the relevant date, the rate quoted by a major reference bank in the London interbank market reasonably selected by the Lender. 4. Republic Act No. 9243 An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)