ITAD BIR Ruling No. 136-13

May 16, 2013 ITAD BIR RULING NO. 136-13 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-32-10 Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St. Salcedo Village, Makati City 1227 Attention: Atty. Maria Victoria D. Sarmiento Atty. Abigail D. Sese Gentlemen : This refers to your tax treaty relief application filed on September 8, 2010 on behalf of JAPAN ENVIROCHEMICALS, LTD. ("JEC"), requesting confirmation that interest payments made to JEC by DAVAO CENTRAL CHEMICAL CORPORATION ("DCCC") are subject to the preferential tax rate of 10 percent pursuant to 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") . It is represented that JEC, with address at 3-6-14, Bingomachi, Chuo-ku, Osaka City, 541-0051, Japan, is a corporation duly organized and existing under the laws of Japan to engage in the business of research, development, manufacturing, import-export, purchase, and sale of activated carbon, wood preservatives, industrial preservatives, water treatment carriers, environmental pollutant test kits, phosphorus absorbent, and any and all businesses relating or incidental to each of the foregoing as provided for in its Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 16, 2010; and that, on the other hand, DCCC, with address at Km. 19, Tibungco, Davao City, 8000, is a corporation duly organized and existing under Philippines laws, registered with the Board of Investments (BOI) as a preferred pioneer enterprise for the production/manufacture and export of active carbon with a registered capacity of 1,920 1 MT/year, as shown in BOI Certificate of Registration as Export Producer No. 72-104 issued by the BOI on February 7, 1972. It is also represented that on May 3, 2010, a Loan Agreement was entered into by and between JEC and DCCC whereby both parties agreed on the following: TaHIDS 1. Principal amount of loan and Purpose JEC agrees to extend a term loan to DCCC in the principal amount of One Hundred Million Yen (Y100,000,000.00) for the purpose of financing DCCC's purchase of machinery and pieces of equipment to be used in the construction of DCCC's new production line. 2. Loan disbursement and Payment The loan shall be disbursed by telegraphic transfer remittance to the bank account specified by and under the name of DCCC on or before May 11, 2010, and shall be paid for the account of JEC in ten (10) consecutive substantially equal semi-annual installments beginning on March 31, 2011 until September 30, 2015 in accordance with Schedule A of the Loan Agreement. 3. Interest rate DCCC shall pay to JEC interest at the rate of 0.54% per annum on the unpaid principal amount of the loan, which interest shall accrue on the basis of a year of three hundred sixty-five (365) days and actual days elapsed. 4. Payment and Manner of payment of interest DCCC shall pay interest for the account of JEC in eleven (11) consecutive substantially equal semi-annual installments commencing on September 30, 2010 until September 30, 2015 in accordance with the aforementioned Schedule A of the Loan Agreement, by telegraphic transfer remittance to the bank account specified by and under the name of JEC. It is further represented, as shown in the submitted proof of incoming foreign remittance, that the subject loan amount of JPY100,000,000.00 was credited to the account of DCCC in the Bank of Tokyo-Manila branch from the Bank of Tokyo-Mitsubishi UFJ, Ltd. by order of JEC on May 7, 2010. Furthermore, as shown in the certified copy of proof of actual payment of interest, i.e., an Advice of Debit issued by the Bank of Tokyo-Mitsubishi UFJ, Manila branch, interest payment on the subject loan in an amount of JP195,732.00 was remitted by DCCC to the account of JEC in the Bank of Tokyo-Mitsubishi UFJ, Ltd. on September 30, 2010. It is finally represented that the transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per Secretary's Certificate issued by DCCC dated August 15, 2010. In reply, please be informed that interest income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28, paragraph B, sub-paragraph 5 (a) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337 (Tax Code of 1997, as amended). It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . cEATSI (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 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 Tax Code of 1997, as amended, provides: "SEC. 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: 2 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." Accordingly, the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the interest payments of DCCC to JEC. Its Article 11 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. 3. Notwithstanding the provisions of paragraph (2), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. TaDIHc For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: (a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; (b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 4. 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. 5. The provisions of paragraphs (1) and (2) above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political subdivision or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. . . ." IEaATD Based on the above provisions, interest on foreign loans which are generally taxable in the Philippines at the rate of 20 percent may qualify for a preferential rate of 10 percent of the gross amount thereof 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 thereof, considering that the JEC, the beneficial owner of the subject interest, has no fixed place of business in the Philippines to which said interest may be effectively connected, this Office is of the opinion and so holds that the interest derived by JEC from DCCC under the herein Loan Agreement is subject to the preferential tax rate of 10 percent of its gross amount, pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-32-10 dated August 27, 2010) Moreover, said Loan Agreement entered into between JEC and DCCC 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 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. Amended from 1,920 MTPY to 2,800 MTPY and export commitment amended at least 70% of its production, per Board Minutes dated December 15, 1995. 2. TITLE II TAX ON INCOME.