ITAD BIR Ruling No. 149-15

May 4, 2015 ITAD BIR RULING NO. 149-15 Article 11 (Interest) Philippines-Japan tax treaty, as amended Transnational Diversified Corporation Penthouse, Net Quad Building 4th Ave. cor. 30th St., E-Square Crescent Park West Bonifacio Global City, Taguig Attention: Ms. Melitha F. Gasapos Corporate Secretary Gentlemen : This refers to your tax treaty relief application filed on October 9, 2013 requesting confirmation that interest paid by Transnational Uyeno Maritime, Inc. ("TUMI") to Uyeno Transtech Ltd. ("Uyeno Transtech") is subject to income tax at the rate of 10 percent pursuant to 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 by a Protocol 1 ("Philippines-Japan tax treaty, as amended") . Facts Uyeno Transtech is a foreign corporation and a resident of Japan based on its Articles of Incorporation and Certificate of Residence issued by the Yokohamanaka Tax Office in Japan on March 6, 2013. Uyeno Transtech is located at 46 Yamashita-Cho, Naka-ku, Yokohama, Japan. Based on the Certification of Non-Registration issued by the Securities and Exchange Commission on March 24, 2013, Uyeno Transtech is not registered as a corporation or partnership in the Philippines. On the other hand, TUMI is a domestic corporation located at Ground Floor, Harbor Center Building I, A.C. Delgado corner 23rd and 24th Streets, Port Area, Manila, Philippines. On September 30, 2013 , TUMI and Uyeno Transtech entered into a Loan Agreement where Uyeno Transtech granted TUMI a loan amounting to US$200,000.00 for the purpose of establishing a working fund, particularly for the payment of value added tax of MT Sunrise Sampaguita , an oil and chemical tanker managed by TUMI. The loan amount of US$200,000.00 was drawn on October 10, 2013. The loan bears an annual interest rate of 2.87 percent payable on a monthly basis together with the principal commencing on November 29, 2013 until May 30, 2018 (55 months). Based on the Certification issued by Banco De Oro Unibank, Inc. 2 (BDO) on October 18, 2013, the proceeds of the loan were credited to TUMI's account on October 11, 2013. Based on the Foreign Telegraphic Transfer Form issued by BDO on November 28, 2013, TUMI remitted interest payments amounting to US$4,293.52 on November 28, 2013. Ruling In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest income earned by nonresident foreign corporation. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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, under Section 32 (B) (5) of the Tax Code, as amended, provides, viz. : "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: 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." Relative thereto, please be informed that Article 11 of the Philippines-Japan tax treaty, as amended provides as follows: " 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." Under Article 11, interest arising in the Philippines and paid to a resident of Japan is subject to income tax in the Philippines at a rate not to exceed 10 percent. Accordingly, since Uyeno Transtech is a resident of Japan, such interest paid to it by TUMI with respect to the loan shall subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of Philippines-Japan tax treaty, as amended. Finally, under Section 179 of the Tax Code, the Loan Agreement, being debt-instruments, is subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of drawdown, to wit: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: 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 ratio of its terms 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. Protocol Amending 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 effective January 1, 2009 . 2. Located at BDO Corporate Center, 7899 Makati Avenue, Makati City, Philippines.