ITAD BIR Ruling No. 161-13

June 14, 2013 ITAD BIR RULING NO. 161-13 Article 11, Philippines-Japan tax treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Lucill Q. Vicerra Principal, Tax & Customs Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed June 15, 2012, on behalf of Sagara Plastics Industrial Company Ltd. ("Sagara Plastics") requesting confirmation that the interest paid by Sagara Metro Plastics Industrial Corporation ("Sagara Metro") to Sagara Plastics is subject to 10 percent final withholding tax pursuant to 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 ("Philippines-Japan tax treaty, as amended") . CITDES It is represented that Sagara Plastics , with business address at 1120 Hirooka Fukuroi-shi Shizuoka-Ken, Japan, is a corporation organized and existing under the laws of Japan and is a resident thereof per Residence Certificate issued by the District Director of Iwata Tax Office on August 7, 2012; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated February 8, 2012; that, on the other hand, Sagara Metro is a corporation organized and existing under the laws of the Philippines with its place of business at Special Economic Zone, Barangay Paciano Rizal, Calamba, Laguna; that Sagara Metro has a Registration Agreement with the Philippine Economic Zone Authority on December 28, 2009. It is also represented that on April 27, 2012, Sagara Metro and Sagara Plastics entered into a Loan Agreement ("Agreement") that has payment term of 15 years and shall take effect on May 1, 2012; that pursuant to the Agreement; Sagara Plastics and Sagara Metro have agreed to set-off their respective payables and receivables thus resulting to a single loan agreement where Sagara Plastics shall be the creditor and Sagara Metro the debtor; that as of August 31, 2011, the net receivable of Sagara Plastics from Sagara Metro amounts to a total of 463,301,967 after setting off the payables and receivable between Sagara Metro and Sagara Plastics ; that Sagara Metro shall pay the said amount to Sagara Plastics in Japanese Yen (), and if such amount is still in the Philippine Peso (Php) currency, it shall cause such amount to be converted to using the exchange prescribed by the Bank of Tokyo-Mitsubishi UFJ for August 31, 2011; that the exchange rate referred to above shall also be used in determining the overdue amount; that the overdue amount which is payable by Sagara Metro to Sagara Plastics as of April 30, 2011, after the setting off, amounts to a net of 387,305,268 which amount shall be converted into a long term loan which shall be payable by Sagara Metro to Sagara Plastics ; that the interest rate of 1.5 per annum shall be paid in accordance with Annex "A", and in particular, the first payment of interest shall be on June 30, 2012; that the portion of the principal due shall be paid at the end of each year; that the interest payment was remitted by Sagara Metro to Sagara Plastics on July 2, 2012 per Sworn Statement dated December 10, 2012 executed by the President of Sagara Metro and supported by the Certificate of Outward Remittance dated December 3, 2012 issued by the Bank of the Philippine Islands. Further, it is represented that as of May 1, 2012, Sagara Plastics owns Eighty-One Thousand Three Hundred Sixty (81,360) common shares in Sagara Metro representing 88.43% of Sagara Metro 's total outstanding capital stock per Secretary's Certificate of Sagara Metro dated May 11, 2012. It is finally represented based on the Sworn Certification issued by the Sagara Metro on April 27, 2012, that the interest subject of the application for tax treaty relief is not subject of an 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 derived by a nonresident foreign corporation is generally taxable under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . (B) Tax on Nonresident Foreign Corporation . (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . SAaTHc (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, said interest income may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended, states, 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." Accordingly, Article 11 of the Philippines-Japan tax treaty, as amended, which you have invoked, may apply to interest payments of Sagara Metro to Sagara Plastics . It provides, viz. : "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. 3. Notwithstanding the provisions of paragraph 2, 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 Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. CSEHcT 4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. xxx xxx xxx 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. 6. The provisions of paragraphs 1, 2 and 3 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal 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 case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, interests on foreign loans are generally taxable in the Philippines at the rate of 20 percent. However, interests derived by a corporation which is a resident of Japan may qualify for a preferential rate of 10 percent of the gross amount thereof, under the Philippines-Japan tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. Such being the case, considering that Sagara Plastics does not have any permanent establishment in the Philippines, interest income derived by Sagara Plastics from its Agreement with Sagara Metro shall be subject to a preferential tax rate of 10 percent of its gross amount, pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. Moreover, the Loan Agreement entered into between Sagara Metro and Sagara Plastics is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, at the rate of One Peso (P1.00) for every Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. 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. CADSHI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue