ITAD BIR Ruling No. 179-12

May 2, 2012 ITAD BIR RULING NO. 179-12 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 20-10; BIR Ruling No. ITAD 22-10 JSResources Philippines, Inc. 17th Floor, 6788 Ayala Avenue cor. Oledan Square Makati City Attention: Takeo Inoue Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 20, 2010, on behalf of JFE Shoji Trade Corporation ("JFE-Japan") , requesting confirmation that the interests due on the loan made by JFE-Japan to JSResources Philippines, Inc. ("JSRPI") are subject to the 10 percent preferential tax rate pursuant to the amended 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") which took effect on January 1, 2009. It is represented that JFE-Japan is a corporation organized and existing under the laws of Japan and is a resident of Japan with principal office address at 1-6-20 Doujima, Kita-Ku, Osaka, Japan per Residence Certificate issued by the Kita Tax Office dated August 6, 2010; that JFE-Japan has been licensed by the Securities and Exchange Commission ("SEC") under SEC No. F000000645 to establish a branch office in the Philippines ("JFE-Manila branch") ; and that, on the other hand, JSRPI is a corporation duly organized and existing under the laws of the Philippines with office address at 17th Floor, 6788 Ayala Avenue corner Oledan Square, Makati City. It is also represented that JFE-Japan and JSRPI entered into a Revolving Loan Facility Agreement ("Agreement") wherein JFE-Japan extended a revolving loan credit facility, commencing on February 1, 2010 until December 31, 2010, with a maximum principal amount of USD2,875,000, to be issued on a staggered basis; that the interest rate is 1.475% per annum; that interest payment shall be made on June 30, 2010 and on December 31, 2010; that the principal amount of each advance outstanding shall be repaid on December 31, 2010; and that, pursuant to the Agreement, the amount of USD350,000 was lent to JSRPI as evidenced by the Certificate of Incoming Foreign Remittance issued by the Bank of Tokyo-Mitsubishi UFJ, Manila Branch dated February 8, 2010. EcIDaA Moreover, the submitted Debit Advice of Outgoing Foreign Remittance issued by the Bank of Tokyo-Mitsubishi UFJ, Manila branch shows that an amount of USD2,586,301.94 was transferred by JSRPI to the account of JFE-Japan at the Bank of Tokyo-Mitsubishi, UFJ in Tokyo, Japan on December 17, 2010 as payment for the loan. It is finally represented that the issue or transaction subject of the application for tax treaty relief is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal, as confirmed by JSRPI in its certification dated August 25, 2010. In reply, please be informed that interest income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28, paragraph B, sub-paragraph 5 (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. 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; xxx xxx xxx" 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, provides: "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: 1 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. TDCcAE xxx xxx xxx" Thus, Article 11 of the Philippines-Japan tax treaty, as amended, which you have invoked, may apply to the instant case. It provides: "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. xxx xxx xxx 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. 5. The provisions of paragraphs (1) and (2) 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. aETDIc xxx xxx xxx." (Underscoring ours) Based on the above, JFE-Japan cannot avail of the preferential rates if it carries on business in the Philippines through a fixed place therein, like in the instant case, a branch office, and, the right to receive interest is effectively connected with such fixed place of business of JFE-Japan in the Philippines. However, in a Sworn Certification executed by the General Manager of JFE-Manila branch on March 4, 2011 he attested that JFE-Manila branch is not connected with the realization of the interest to be paid by JSRPI to JFE-Japan. Hence, the requested relief for the subject interest may still be availed of. In view thereof, the interest arising in the Philippines and paid by JSRPI to JFE-Japan , the beneficial owner of the interest, shall be subject to tax at the preferential rate of 10 percent of the gross amount of the interest pursuant to Article 11 (2) (b) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. 020-10 dated August 20, 2010, BIR Ruling No. ITAD 022-10 dated August 25, 2010) However, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. 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 Footnotes 1. TITLE II TAX ON INCOME.