ITAD BIR Ruling No. 176-12

April 24, 2012 ITAD BIR RULING NO. 176-12 Article 11, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-193-03 International Container Terminal Services, Inc. ICTSI Administration Building Manila International Container Terminal MICT South Access Road Port of Manila, Manila 1012 Attention: Atty. Benjamin M. Gorospe III Manager Legal Affairs Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 25, 2011 ,requesting for a ruling that interest payment by International Container Terminal Services, Inc. ("ICTSI") to Royal Capital B.V. ("Royal Capital") is subject to the 15 percent preferential tax rate, pursuant to Article 11 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that Royal Capital, with address at Fred. Roeskestraat 123, 1076 EE Amsterdam, The Netherlands, is a corporation organized and existing under the laws of the Netherlands, and is a resident thereof within the meaning of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax Administration, Rivierenland, the Netherlands dated September 16, 2011; that it is not registered either as a corporation or partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated August 24, 2011; and that, on the other hand, ICTSI is a corporation organized and existing under the laws of the Philippines with principal address at ICTSI Administration Building, Manila International Container Terminal, MICT South Access Road, Port of Manila, Manila 1012. It is further represented that on May 3, 2011, pursuant to a Resolution Outside a Formal Meeting by the Management Board of Royal Capital, advances were made available by Royal Capital in the amount of US$200,000,000 ("Advances") to ICTSI which shall be used for the development of Greenfield projects, potential acquisitions and general corporate purposes; that ICTSI shall repay the principal outstanding amount of the Advances at the end of the 10th year following the effective date on May 18, 2011; that the interest on the outstanding balance of the Advances is payable on a semi-annual basis specifically on April 30 and October 30 at the rate of 8.492% per annum; and that the first semi-annual payment date is on October 30, 2011. 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: HIACac "Section 28. Rates of Income Tax on Foreign Corporations. (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (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; However, said income may be exempt from income tax 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: "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." Thus, Article 11 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It states: "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 percent of the gross amount 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 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. xxx xxx xxx 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. ..." Based on the aforequoted provisions, interest income arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a preferential tax rate of not exceeding 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or on any loan of whatever kind granted by a bank, or any other financial institution, or in respect of public issues of bonds, debentures or similar obligations; and in all other cases, 15 percent of the gross amount of the interest. HTSaEC In view thereof, this Office hereby confirms your opinion that the interest payments by ICTSI to Royal Capital shall be subject to a preferential tax rate of 15 percent pursuant to Article 11 (2) (b) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-193-03 dated December 16, 2003) 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