ITAD BIR Ruling No. 167-11

June 7, 2011 ITAD BIR RULING NO. 167-11 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 022-10; BIR Ruling No. ITAD 032-10 Juntec Corporation Block 5, Lot 7, Laguna International Industrial Park Barrio Mamplasan, Bian, Laguna Attention: Imelda M. Bagos General Manager-Accounting Gentlemen : This refers to your application for tax treaty relief application dated January 27, 2011, filed on behalf of Honko Seikosho Company, Ltd. ("Honko") , requesting confirmation that interest paid by Juntec Corporation ("Juntec") to Honko is subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Republic of 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 effective January 1, 2009. ("Philippines-Japan tax treaty, as amended") . It is represented that Honko is a foreign corporation organized and existing under the laws of Japan and is a resident thereof for income tax purposes, based on its Articles of Incorporation, on the Certificate of Status of Taxable Person issued by the Kanagawa Tax Office in Japan on December 21, 2010, and on the Certificate on Residency issued by the Kanagawa Tax Office in Japan on February 1, 2011; that Honko is situated in 5-13-42 Tsunashima-nishi, Kohoku-ku, Yokohama, Kanagawa, Japan; that Honko is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on January 5, 2011; that, on the other hand, Juntec is a corporation organized and existing under the laws of the Philippines, located at Block 5, Lot 7, Laguna International Industrial Park, Bian, Laguna, Philippines; and that Juntec is registered with the Philippine Economic Zone Authority as an ecozone export enterprise under Certificate of Registration No. 96-119 issued on December 19, 1996. IHSTDE It is further represented that on January 24, 2011, Honko and Juntec entered into a Loan Agreement where Honko grants Juntec a loan amounting to 10,000,000.00 to finance its operating activities; that the loan will be paid by making 36 equal payments of 200,000.00 for the whole 2011, 2012 and 2013, 10 equal payments of 200,000.00 for the first 10 months of 2014, and 2 equal payments of 400,000.00 for the remaining 2 months of 2014; that the loan bears interest at the rate of 1.6 percent per annum; that the interest will be paid every month for the whole 2011 to 2013 and for the first 11 months of 2014 based on the unpaid principal of the loan; that on October 20, 2010, Honko , through Citibank Japan Ltd., remitted to Juntec , by telegraphic transfer, an amount of 9,999,395.00 (net of applicable charges) at the latter's account at the Bank of the Philippine Islands Laguna Technopark-PEZA Branch, based on the Certificate of Inward Remittance issued by that bank on January 5, 2011; and that, subsequently, Juntec issued a Promissory Note to Honko where Juntec promises to pay Honko the principal of the loan together with the interest and any applicable fees thereon in accordance with the Agreement. It is finally represented that the interest subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Corporate Secretary of Juntec on January 20, 2011. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended, provides that interest paid to Honko , being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. caSEAH 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: xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such interest may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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" Relative thereto, you invoke the Philippines-Japan tax treaty, as amended. Paragraphs 1, 2, and 3, Article 11 thereof provide: "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 Contracting State. cDEHIC 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 percent of the gross amount of 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. 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 Contacting 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. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States." xxx xxx xxx Based on the foregoing provisions, interest arising in the Philippines and derived by a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent. Moreover, such interest may be exempt if it is derived by the Government of Japan or a political subdivision or local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the Government of Japan, or any resident of Japan under certain conditions. THADEI Accordingly, since the interest at hand is not paid to the Government of Japan, etc., Such interest to be paid by Juntec to Honko under the Agreement, beginning January 1, 2011 2 is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2, Article 11 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 32-10 dated August 27, 2010, BIR Ruling No. ITAD 22-10 dated August 25, 2010) Finally, the Loan Agreement between Honko and Juntec , being a debt instrument, is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or fraction thereof) of the issue price or amount subject of the Agreement. Section 179 of the Tax Code of 1997, as amended, provides: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: 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 ration of its term 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 contract is located or used in the Philippines, instruments and securities issued by the government of 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. CHATcE 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. 2. Pursuant to Revenue Memorandum No. 72-2010 (Prescribing Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) pursuant to existing Philippine Tax Treaties).