ITAD BIR Ruling No. 145-13

May 23, 2013 ITAD BIR RULING NO. 145-13 Article 11 (Interest), Philippines-Korea tax treaty; Section 179, Tax Code of 1997, as amended Hysonic Philippines, Inc. Lot 3 Carmelray Industrial Park II Barangay Tulo, Calamba City, Laguna Attention: Ms. Mae Ruiz Accounting Assistant Manager Gentlemen : This refers to your tax treaty relief application (TTRA) dated March 16, 2012 requesting confirmation that the interest payments by Moatech Realty, Inc. ("Moatech") to Hysonic Co., Ltd. ("Hysonic") are exempt from tax pursuant to 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") , as amended. HSDCTA It is represented that Hysonic is a foreign corporation organized and existing under the laws of Korea with principal address at the 5th Floor, RITC Center, Gyeonggi Techno Park, Sa-dong 705, Haean-ro, Sangrok-gu Ansan-si, Gyeonggi-do, Korea based on the Certificate of Residence issued by the tax authority of Korea on February 14, 2012; that Hysonic is not registered either as a corporation or a partnership in the Philippines based on the Certificate of Non-filing issued by the Securities and Exchange Commission on February 15, 2012; and that, on the other hand, Moatech is a domestic corporation situated at the First Philippine Industrial Park, Barangay Anastacia, Sto. Tomas, Batangas. It is also represented that on November 25, 2011, Hysonic and Moatech entered into a Loan Agreement ("Agreement") whereby Hysonic agreed to lend Moatech the amount of US$1,100,000.00 based on the following schedule: (a) $520,000 in November 2011, (b) $350,000 in January 2012, (c) $230,000 in January 2013; that Moatech shall repay the entire amount to Hysonic by October 31, 2016; that Moatech shall pay interest to Hysonic at a rate of 6.0% per annum at the end of each quarter of the year; that in the event that Moatech fails to pay interest upon due date, Moatech shall pay a delay charge of 20% per annum for the period between the day following the due date and Moatech 's payment of the interest, in addition to the principal; that Moatech paid its first interest to Hysonic on December 28, 2011 based on the Bank Remittance Form validated by Rizal Commercial Banking Corporation on even date; that the interest payments made and to be made by Moatech to Hysonic are not connected with Hysonic Philippines, Inc. based on the Certification issued by Hysonic Philippines, Inc. on June 5, 2012. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides that interest paid to a non-resident income earner is subject to income tax at the rate of 20 percent, thus: "SEC. 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, Section 32 (B) (5) of the Code provides that such interest may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: DAHCaI "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" Thus, you invoke the Philippines-Korea tax treaty. Paragraphs 1, 2 and 3 of 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 the other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, 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 per cent 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 per cent 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. caCTHI xxx xxx xxx" Under paragraphs 2 and 3 of Article 11, interest arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in respect of public issues of bonds, debentures or similar obligation, or if the interest is paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent in all other cases. Furthermore, under paragraph 4 of the same provision, 1 such interest may be exempt if it is paid in respect of (i) a bond, debenture or other similar obligation of the Government of the Philippines or a political subdivision or local authority thereof; (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Bank of Korea, the Korea Exim Bank, the Korea Exchange Bank, and other qualified lending institutions in Korea. Relative thereto, Section 14 of Revenue Memorandum Order No. (RMO) 72-2010 2 which took effect on November 4, 2010, provides that: "SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (emphasis supplied) Accordingly, inasmuch as the subject loans are not public issues of bonds, debentures or similar obligation, such interests paid by Moatech to Hysonic under the Agreement on or before March 16, 2012 3 are subject to 20 percent final withholding tax based on Section 28 (B) (5) of the tax code of 1997 above-quoted, while interests payable beginning March 17, 2012 , 4 are subject to 15 percent final withholding tax of the gross amount of the interests pursuant to paragraph 2 (b), Article 11 of the Philippines-Korea tax treaty. cTIESa Finally, Section 179 of the Tax Code of 1997, as amended, provides that the Loan Agreements, being debt instruments, are subject to documentary stamp tax at the rate of one peso (PhP1.00) for every Two Hundred Pesos (PhP200.00), or a fraction thereof of the amount subject of the Agreements, thus: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ration of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. . . ." 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 Footnotes 1. "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 (aa) in the case of the Philippines, the Central Bank of the Philippines; (bb) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank; and (cc) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Contracting States." 2. Guidelines on the Processing Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties. 3. Actual date of filing the TTRA. 4. Pursuant to Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) .