ITAD BIR Ruling No. 180-12

May 2, 2012 ITAD BIR RULING NO. 180-12 Article 10, Philippines-United Kingdom tax treaty; BIR Ruling No. 142-94 Zambrano & Gruba Law Offices 27th Floor, 88 Corporate Center 141 Sedeno Street, Salcedo Village Makati City 1227 Attention: Samantha Paula G. Dy Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 30, 2011, requesting confirmation that the interest payment by E D & F Man Philippines, Inc. ("EDF-Phil") to E D & F Man Treasury Management PLC ("EDF-UK") is subject to a 15 percent preferential tax rate under Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty"). It is represented that EDF-UK, with registered office at Cottons Centre, Hay's Lane, London, SE1 2QE, United Kingdom, is a corporation organized and existing under the laws of the United Kingdom, and is a resident thereof in accordance with Article 4 of the Philippines-United Kingdom tax treaty as certified by the Inspector of Taxes of the HM Revenue & Customs on October 4, 2010; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated June 21, 2011; and that, on the other hand, EDF-Phil is a corporation duly organized and existing under the laws of the Philippines with principal address at 37th Floor Rufino Tower, 6784 Ayala Avenue, Makati City. It is further represented that on June 28, 2010, EDF-UK and EDF-Phil entered into a Facility Letter ("Agreement") under which EDF-UK agrees to make available to EDF-Phil a credit facility with a maximum principal limit amount of Ten Million United States Dollars (US$10,000,000.00) with an interest margin of 4.5% per annum over LIBOR, as stated on the Notification to Credit Facility issued by EDF-UK; that based on Payment Credit Advice issued by the Standard Chartered Bank on October 18, 2011, an amount of One Million United States Dollars (US$1,000,000.00) was credited in favor of EDF-Phil by EDF-UK thru Chase Manhattan Bank, London; and that the Agreement will remain effective until further notice of termination. It is finally represented, based on a Sworn Statement issued by EDF-Phil on March 31, 2011, that the transaction subject of the request for 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 of the taxpayer/s involved. 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: HICEca "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, the provisions of Article 10 of the Philippines-United Kingdom tax treaty, which you invoke, may apply to the instant case. It states: "Article 10 INTEREST 1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also 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 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. xxx xxx xxx 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other 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. xxx xxx xxx" Based on the foregoing, interest arising in the Philippines and paid to a resident of the United Kingdom may be subject to Philippine tax at a rate not to exceed 15 percent of the gross amount of the interest; or 10 percent if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. Accordingly, the interest paid by EDF-Phil to EDF-UK under the subject Agreement shall be subject to tax at the rate of 15 percent, based on the gross amount thereof, pursuant to Article 10 (2) of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 142-94 dated September 20, 1994) Moreover, drawdowns made under the subject Agreement shall be 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. IaAScD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue