ITAD BIR Ruling No. 183-12

May 3, 2012 ITAD BIR RULING NO. 183-12 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-115-11; BIR Ruling No. ITAD-032-10 IHI Philippines, Inc. Unit 1104, West Tower PSE Center Exchange Road Ortigas Center, Pasig City Attention: Yoshinobu Sogawa President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 14, 2011, on behalf of IHI Corporation ("IC"),requesting confirmation that the interest paid by IHI Philippines, Inc. ("IPI") to IC is subject to 10 percent final withholding tax 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"). It is represented that IC, with principal office at 1-1, Toyosu 3-chome, Koto-Ku, Tokyo 135-8710, Japan, is a resident of Japan within the meaning of the Philippines-Japan tax treaty based on the certification issued by the District Director of Koto-nishi Tax Office on July 20, 2011; and that IPI, on the other hand, is a domestic corporation, with office address located at Unit 1104, West Tower, PSE Center Exchange Road, Ortigas Center Pasig City. It is further represented that on November 24, 2010, IPI and IC entered into a Loan Agreement whereby IPI borrowed from IC Fifteen Million Japanese Yen (15,000,000JPY) with an interest rate of one and nine-twentieths percent per annum on the balance of the Loan; and that IPI shall pay IC in accordance with the following repayment schedule: 2011 2012 2013 2014 Mar. 31 1,250,000 1,250,000 1,250,000 June 30 1,250,000 1,250,000 1,250,000 Sept. 30 1,250,000 1,250,000 1,250,000 Dec. 31 1,250,000 1,250,000 1,250,000 In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28, paragraph B, sub-paragraphs 1 and 5 (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (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 interest income may be exempt or partially exempt from income tax pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code, 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." AHcaDC Accordingly, Article 11 of the Philippines-Japan tax treaty, as amended, which you have invoked may apply to the interest payments of IPI of IC. It provides, viz. : "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. 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 Contracting 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. 5. 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. 6. The provisions of paragraphs 1, 2 and 3 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. xxx xxx xxx" Based on the above provisions, interests on foreign loans are generally taxable in the Philippines at the rate of 20 percent. However, interests derived by a corporation which is a resident of Japan may qualify for a preferential rate of 10 percent of the gross amount thereof, under the Philippines-Japan tax treaty, as amended, if the recipient of such interest is also the beneficial owner thereof. EAcTDH Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order No. ("RMO") 72-2010, published in Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides as follows: Section 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO . " (Emphasis supplied) In view thereof, since the TTRA was filed on July 14, 2011 ,after the date of effectivity of the Agreement which was on November 24, 2010, this Office hereby DENIES relief on interest payments made before filing of the TTRA on July 14, 2011, being in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the interest payment. Accordingly, said payments shall be subject to tax at the rate provided in Section 28 of the aforementioned Tax Code of 1997, as amended. On the other hand, the interest payments by IPI to IC from the time of filing of this application on July 14, 2011 ,under the Loan Agreement, are entitled to 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-115-11 dated April 11, 2011; BIR Ruling No. ITAD-032-11 dated August 27, 2010) Moreover, the Loan Agreement entered into between IC and IPI 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. DAHSaT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue