ITAD BIR Ruling No. 155-12

April 4, 2012 ITAD BIR RULING NO. 155-12 Article 11, Philippines-Korea Tax Treaty; BIR Ruling No. ITAD-008-11 Sunjin Philippines Corporation 102 Bo. Partida, Norzagaray, Bulacan Attention: Ms. Lourdes S. Bernabe Finance & Accounting Team Leader Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 27, 2011 requesting confirmation that the interest derived by the Export-Import Bank of Korea ("KEXIM") from the loan it extended to Sunjin Philippines, Inc. ("Sunjin") is exempt from income 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"). It is represented that KEXIM, with office address at 16-1, Yeouido-Dong, Yeongdeungpo-Gu, Seoul, Korea, is a foreign corporation organized and existing under the laws of Korea and a resident thereof per Certification of Business Registration issued by the Head of Yeongdeungpo District Tax Office of the National Tax Service dated April 25, 2011; that KEXIM is primarily engaged in the business of providing finance required for overseas economic cooperation, such as export and import, and overseas investment; that KEXIM was previously licensed by the Securities and Exchange Commission (SEC) to establish a representative office in the Philippines but said license was cancelled on January 20, 1999 per Certificate of Corporate Filing/Information dated May 16, 2011 issued by SEC; and that, on the other hand, Sunjin is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at 102 Bo. Partida, Norzagaray, Bulacan. It is further represented that KEXIM and Sunjin entered into a Loan Agreement ("Agreement") in March 2011 whereby KEXIM extended a loan facility in favor of Sunjin in the amount of Two Million U.S. Dollars (US$2,000,000) to be used exclusively for the general working capital of Sunjin; that an amount of One Million Nine Hundred Ninety-Nine Thousand Nine Hundred Eighty-Five US Dollars ($1,999,985.00) was disbursed by KEXIM on March 25, 2011 and has been credited to the account of Sunjin on March 28, 2011; that Sunjin shall pay interest on the daily outstanding and unpaid amount of the Loan 1 for each Interest Period 2 per annum equal to the sum of the Margin 3 and LIBOR; that interest shall be paid on the "interest payment date" which is the last day of the "interest period"; that "interest period" shall be three months, provided, that, the first interest period shall commence on the date on which the disbursement is made (i.e., March 25, 2011 is the date of disbursement then June 25, 2011 is the last day of interest period and hence, interest payment date). AHDTIE It is finally represented based on the Sworn Statement issued by Sunjin dated May 23, 2011, that the interest subject of the application for tax treaty relief is not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that interest income on foreign loans received by a nonresident foreign corporation are generally governed by Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, by Republic Act No. 9337. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (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 Tax Code 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. cITAaD xxx xxx xxx" In relation thereto, Article 11 of the Philippines-Korea tax treaty which you invoked may apply to the instant case. It provides: "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. 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: ISTCHE (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. 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. xxx xxx xxx" Under paragraph 4, Article 11 of the Philippines-Korea tax treaty, interest arising in the Philippines and paid to a resident of Korea shall be taxable only in Korea if the interest is paid in respect of a bond, debenture or other similar obligation of the government of Korea 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 KEXIM, the Bank of Korea and 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. Accordingly, since the lender of the subject loan is KEXIM, this Office is of the opinion that the interest arising from the subject loan is exempt from Philippine income tax pursuant to Article 11 (4) of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 008-11 dated January 19, 2011) Moreover, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of Tax Code of 1997, as amended. 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. "Loan" means the aggregate principal amount disbursed under the Agreement and from time to time outstanding. 2. "Interest Period" means an interest period ascertained in accordance with Section 4.2 of the Agreement. 3. "Margin" means Two point Fifty percent (2.50%).