ITAD BIR Ruling No. 161-11

May 25, 2011 ITAD BIR RULING NO. 161-11 Article 11, Philippines-Belgium Tax Treaty Sec. 28 of the Tax Code of 1997 Tan Venturanza Valdez 2704 East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center 1605 Pasig City Attention: Atty. Enrico G. Valdez Gentlemen : This refers to your letter dated April 8, 2009 on behalf of Jan De Nul (Phils), Inc. (hereinafter referred to as "Jan De Nul" ), requesting confirmation that the interest payments by Jan De Nul to Flanders Dredging Corporation NV (hereinafter referred to as "Flanders" ) are subject to a 10 percent preferential tax rate pursuant to Protocol Amending the Agreement between the Republic of the Philippines and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Belgium tax treaty" ). It is represented that Flanders (Dutch name: Vlaamse Bagger Maatschapp ) is a nonresident foreign corporation organized and existing under the laws of the Belgium with registered address at Tragel 60, 9308 AALST with value-added tax number BE 451.192.431 evidenced by Declaration Concerning the Capacity of the Taxpayer issued by the Federal Government Service Finance Department dated October 14, 2008; that Flanders is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on November 27, 2008; that, on the other hand, Jan De Nul is a corporation duly organized and existing under the laws of the Philippines with principal address located at Rm. 305, The Excelsior Bldg., 161 Roxas Blvd., Baclaran, Paraaque City. It is further represented that on October 1, 2008, Flanders and Jan De Nul entered into a Loan Agreement, where Flanders is willing to provide a loan facility in the maximum amount of Six Million US Dollars which shall bear interest at LIBOR US Dollar (3 months) plus 2% per annum; that the interest shall be compounded every three months; that the term of the loan facility shall be five (5) years with the option to pay back for the principal and accrued interest; and that the subject transaction 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest income earned in the Philippines by a nonresident foreign corporation. It provides: "Section 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 interest, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). CcAHEI xxx xxx xxx" However, Section 32 (B) (5) of the same Code 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" In this particular case you invoke Article 11 of the Philippines-Belgium tax treaty, which provides as follows: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that 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 beneficial owner of the interest is a resident of the other Contracting State 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 shall be exempted from tax in the Contracting State in which it arises if it is: (a) interest paid in respect of a bond, debenture or other similar obligation of the Government of that Contracting State or of a political subdivision or local authority thereof; and (b) interest paid in respect of a loan made, guaranteed or insured or a credit extended, guaranteed or insured by such institution as is specified and agreed in letters exchanged between the competent authorities of the 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, as well as income assimilated to or taxed in the same way as income from money lent by the taxation law of the State in which the income arises, including interest on deferred payments. However, the term 'interest' shall not include for the purpose of this Article interest regarded as dividends under paragraph 3 of Article 10. xxx xxx xxx" Based on the foregoing, interest income which arises in the Philippines and paid to a resident of Belgium will be taxed at a preferential tax rate not exceeding 10 percent of the gross amount of interest if the recipient of such interest is also the beneficial owner thereof and exempt if the interest is paid in respect of a bond, debenture or obligation of the Government of Belgium or guaranteed by competent authorities as specified and agreed in letter of exchanged. AHCETa Such being the case, since Flanders is a resident of Belgium and is the beneficial owner of the interest income on the subject loan between Jan De Nul and Flanders , said interest income is subject to a preferential tax rate of 10 percent pursuant to the Philippines-Belgium tax treaty. Moreover, the said Agreement is subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997 provides as follows: SEC. 179. Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments. On each bank check, draft, or certificate of deposit not drawing interest, or order for the payment of any sum of money drawn upon or issued by any bank, trust company, or any person or persons, companies or corporations, at sight or on demand, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50). 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