ITAD BIR Ruling No. 155-13

June 14, 2013 ITAD BIR RULING NO. 155-13 Article 11, Philippines-Netherlands tax treaty Benguet Nickel Mines, Inc. Monsalud Building, Lipay Sta. Cruz, Zambales Attention: Max D. Arceo AVP Treasury Gentlemen : This refers to your application for tax treaty relief filed on September 3, 2012, requesting confirmation that the interest payments made by Benguet Nickel Mines, Inc. ("Benguet PH") to Amsterdam Trade Bank N.V. ("Amsterdam") are subject to preferential rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . Basic Representations It is represented that Amsterdam is a foreign corporation organized and existing under the laws of the Netherlands with principal address at Herengracht 469-475, 1017 BS Amsterdam based on the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands on August 23, 2012; that Amsterdam is a financial institution established in Netherlands whose authorized capital stock is 411,719,131.80 and is divided into 907,310 shares of 453.78 each; that Amsterdam is not registered either as a corporation or as a partnership based on the Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission on October 23, 2012; that on the other hand, Benguet PH is a domestic corporation with business address at Monsalud Building, Lipay, Sta. Cruz, Zambales. It is also represented that on July 12, 2012, Amsterdam and Benguet PH entered into the following agreements: 1.) Facility Agreement whereby Amsterdam will make available to Benguet PH a Dollar term loan facility in the aggregate amount of US$20,000,000.00 with an accordion feature of US$5,000,000.00; that Benguet PH shall repay an amount equal to the Repayment Instalment on each repayment date; that the rate of interest on each loan for each interest period is the percentage rate per annum which is the aggregate of the applicable: cTESIa a. Margin; b. LIBOR; c. Mandatory Cost, if any; that the interests shall be paid according to the following schedule: Payment Date Amount 12/14/2012 242,448.65 12/21/2012 80,564.13 3/14/2013 207,164.91 3/21/2013 79,678.81 6/14/2013 179,188.79 6/21/2013 81,449.45 9/14/2013 146,609.01 9/21/2013 81,449.45 12/14/2013 112,789.78 12/21/2013 80,564.13 3/14/2014 79,678.81 3/21/2014 79,678.81 6/14/2014 48,869.67 6/21/2014 81,449.45 9/14/2014 16,289.89 9/21/2014 81,449.45 12/21/2014 64,451.30 3/21/2015 31,871.52 that Benguet PH shall pay accrued interest on that loan on the last day of each interest period; that if Benguet PH fails to pay any amount payable by it under the agreement on its due date, interest shall accrue on the overdue amount from the due date up to the date of actual payment (both before and after judgment) at a rate which is below two percent higher than the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a loan in the currency of the overdue amount for successive interest periods, each of a duration selected by the agent acting reasonably; and that any interest accruing under this shall be immediately payable by Benguet PH on demand by Amsterdam ; and that the first interest payment was made on December 14, 2012 based on the computer print-out attached to the letter of Assistant Vice President of Benguet PH dated January 31, 2013. 2.) Pledge over Bank Accounts being a condition precedent to the obligations of Amsterdam under and pursuant to the Facility Agreement whereby Benguet PH grants to Amsterdam a first right of pledge over all present and future rights and claims, which Benguet PH has against the account bank in connection with the bank accounts together with the interest on those rights and claims as security for the prompt payment of the secured obligations of Benguet PH to Amsterdam under the Facility Agreement ; 3.) Assignment of contracts by way of security whereby Benguet PH assigned to Amsterdam the benefit of certain contracts including the sale of nickel by way of security under the Facility Agreement. and that Amsterdam is not a shareholder of Benguet PH based on the Certificate issued by the Corporate Secretary of Benguet PH dated January 29, 2013. Ruling A. On income tax In reply, please be informed that Sections 28 (B) (1) and 25 (B), respectively, of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provide: TDCaSE "SEC. 28. Rates of Income Tax on Foreign Corporations. . . . (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%)." However, such interests may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. 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. xxx xxx xxx" 1.) Interest payments under the Agreements Relative thereto, you invoke the Philippines-Netherlands tax treaty . Article 11 thereof provides: "Article 11 Interest 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the 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 cross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or CaESTA (ii) on any loan of whatever kind granted by a bank, or any other financial institution , (iii) in respect of public issues of bonds, debentures or similar obligations . b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. 4. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraphs 2 and 3. 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article . 6. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient of the interest, being a resident of one of the States, carries on in the other State in which the interest arises, a trade or business through a permanent establishment situated therein, or performs in that other State professional 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 a case, the provisions of Article 7 or Article 14, as the case may be, shall apply." (underscoring supplied) Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of the interest if it is paid with respect to the sale on credit of any industrial, commercial or scientific equipment, to a loan granted by a bank or a financial institution, or to public issues of bonds, debentures, or similar obligations; and (b) 15 percent of the gross amount of the interest in all other cases. Under paragraph 3 of the same article, such interest may be exempt if the interest is paid with respect to a bond, debenture, or other similar obligation of the Philippine government, or a political subdivision or a local authority of the Philippines, or with respect to a loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. Accordingly, the interest payments made by Benguet PH to Amsterdam under the Agreement are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to paragraph 2 (a) (ii), Article 11 of the Philippines-Netherlands tax treaty. The interest payments cannot be exempt since the borrower is not the Philippine government, or a political subdivision or a local authority of the Philippines, nor the Loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. TAHIED 2.) On default interest Clause 8.4 of the Facility Agreement provides: "Default interest If an Obligor (Benguet PH) fails to pay any amount payable by it under a Finance Document (Facility Agreement) on its due date, interest shall accrue on the overdue amount from the due date up to the date of actual payment (both before and after judgment) at a rate which, . . .is two percent higher than the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a loan in the currency of the overdue amount for successive interest periods, each of a duration selected by the agent acting reasonably. Any interest accruing . . . shall be immediately payable by the Obligor on demand by the Agent." It shall be noted that Penalty Charges for late payment of interest due shall not be regarded as interest for the purpose of Article 11 (5) of the Philippines-Netherlands tax treaty which provides: "5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article ." (underscoring supplied) Thus, should there be payments for default interest under Clause 8.4 of the Facility Agreement above-quoted made by Benguet PH to Amsterdam , such interest on overdue payments or penalty charges cannot be covered either by a residual article on other income or an article on income not expressly covered by the preceding articles of a tax treaty as such article is not present in the Philippines-Netherlands tax treaty. Where such a residual article is lacking, interest on overdue payments or penalty charges to be paid by Benguet PH to Amsterdam under the Facility Agreement are taxable in accordance with the domestic tax laws of the Philippines. Particularly, such income shall be subject to income tax at the rate of 30 percent based on the gross amount thereof under Section 28 (B) (5) (a) of the Tax Code of 1997, as amended. B. On documentary stamp tax Finally, the Facility Agreement is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended, which provides: "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. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." 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. TSIDaH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue