ITAD BIR Ruling No. 174-13

June 20, 2013 ITAD BIR RULING NO. 174-13 Article 11, Philippines-Germany Tax Treaty Fresenius Kabi Philippines, Inc. 16th Floor, Unit D Equitable Bank Tower 8751 Paseo De Roxas Makati City Attention: Ms. Ma. Rosario P. Dizon Finance Director Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 27, 2012, on behalf of Fresenius Kabi AG ("FKAG") requesting confirmation that the interest paid to FKAG by Fresenius Kabi Philippines, Inc. ("FKPI") is subject to 15 percent preferential tax rate pursuant to Article 11 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . IaDSEA It is represented that FKAG, with office address at Else-Kroner-Str. 1, 61352 Bad Homburg, Germany, is a resident of Germany within the meaning of the Philippines-Germany tax treaty, based on the Certificate of Residence issued by the German Tax Administration dated May 31, 2012; that FKAG is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 10, 2012; and that, on the other hand, FKPI is a corporation duly organized and existing under the laws of the Philippines with office address at Unit D, 16th Floor, Equitable Tower, Paseo de Roxas, Avenue, Makati City. It is further represented that on June 16, 2011, FKPI and FKAG entered into a Loan Agreement in the amount of Php380 million to settle FKPI's outstanding intercompany payables and for its general working capital; that per letter dated July 26, 2012 of the International Operations Department of the Bangko Sentral ng Pilipinas (BSP), the said loan was registered under registration number BSP-IOD (ST) 2012-001 pursuant to the Manual of Regulations on Foreign Exchange Transactions of the BSP; that the interest on the loan will be based on the Philippines' 1 Year Interbank Reference Rate 4 p.m. fixed two business days prior first installment plus a margin based on the refinancing costs of FKAG, currently 150 basis points p.a. and a margin based on the financial standing and the economic environment of FKPI, currently 62,50 basis points p.a.; that the interest calculation will commence from the first installment date; that per Certificate of Inward Remittance of Foreign Exchange of Deutsche Bank AG, Manila Branch, FKAG remitted EUR1,035,509.64 to the account of FKPI on June 7, 2011; and that on July 30, 2012, FKPI remitted the interest to FKAG as evidenced by a Certification issued on August 23, 2012 by FKPI. It is further represented that FKAG does not own and hold any share in the capital stock of FKPI per Secretary's Certificate issued on July 24, 2012 by FKPI. It is finally represented based on the Sworn Certification issued by the FKPI on July 4, 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 (NIRC of 1997), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . ASIDTa (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 NIRC of 1997, as amended, provides, 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-Germany tax treaty, which you invoked, may apply 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 that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of such interest in all other cases. ICacDE 3. Notwithstanding the provisions of paragraph 2. a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply. 4. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of the other Contracting State as by "Hermes Deckung" in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or 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 from which the income is derived. 6. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, has in the other Contracting State in which the interest arises a permanent establishment with which the debt-claim from which the interest arises is effectively connected. In such a case, the provisions of Article 7 shall apply." Based on the aforequoted provisions, the interest paid to a resident of Germany will be taxed at a preferential rate not exceeding 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or in respect of a loan of whatever kind granted by a bank, or public issues of bonds, debentures or similar obligations, and in all other cases, 15 percent of the gross amount of interest. However, if the interest income is derived in respect of a loan made, guaranteed or insured by "Hermes Deckung" or any other government instrumentality of the Federal Republic of Germany as specified and agreed in letters exchanged between the competent authorities of the Contracting States, the interest income shall be exempt from Philippine income tax. For this purpose, the competent authority for the Federal Republic of Germany is its Federal Ministry of Finance. cHaDIA Such being the case, considering that interest paid to FKAG is not in connection with the sale on credit of any industrial, commercial or scientific equipment, or in respect of a loan of whatever kind granted by a bank, or public issues of bonds, debentures or similar obligations, interest income derived by FKAG from its Agreement with FKFI shall be subject to a preferential tax rate of 15 percent of its gross amount, pursuant to Article 11 (2) (b) of the Philippines-Germany tax treaty. Moreover, the herein Loan Agreement 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) on each 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 foregoing 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