ITAD BIR Ruling No. 193-11

July 12, 2011 ITAD BIR RULING NO. 193-11 Article 11, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 66-10 Manabat Sanagustin & Co. Certified Public Accountants 9th Room, The KPMG Center 6787 Ayala Avenue, Makati City Attention: Ma. Carmela M. Peralta Principal Tax Gentlemen : This refers to your letter dated June 7, 2010 requesting confirmation that interest derived by UNILEVER FINANCE INTERNATIONAL B.V. ("Unilever") on the loan it granted to UNILEVER PHILIPPINES, INC. ("Unilever Philippines") is subject to income tax at a preferential rate of 15 percent under The Convention between the Kingdom of the Netherlands and the Republic of the Philippines 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 Unilever is a foreign corporation organized and existing under the laws of the Netherlands based on the Declarations of Residence issued by the Tax Administration of Rivierenland/Kantoor Arnhem and of Rijnmond/Kantoor Rotterdam of the Netherlands on June 15 and April 28, 2010; that Unilever is situated at Weena 455, 3013 Al Rotterdam, the Netherlands; that Unilever is not registered either as a corporation or partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on May 13, 2010; and that, on the other hand, Unilever Philippines is a domestic corporation situated at 1351 United Nations, Manila, Philippines. It is further represented that Unilever and Unilever Philippines entered into a Master Loan Agreement where both parties entered into and agree to enter into one or more transactions (each a "Loan" ) whereby Unilever Philippines borrows money from Unilever ; that each Loan will be governed by the terms and conditions set forth in the Agreement and in the documents (the "Confirmation" ) exchanged between Unilever and Unilever Philippines confirming the Loan; that a Loan may be extended for further period, at similar or amended terms, to be specified in the Confirmation; that the aggregate principal amount of all Loans shall not exceed US$300,000,000.00 or in any other currency; that interest shall be payable by Unilever Philippines on the outstanding principal amount of the Loan at such rate and on such interest payment dates agreed between Unilever and Unilever Philippines and specified in the relevant Confirmation; that if repayment of principal is not made on the due date or is otherwise not made in accordance with the terms and conditions of the Loan, interest will at the default rate continue to accrue from the due date up to and including the date on which actual payment is made to Unilever ; that default rate means a rate per annum equal to the cost to Unilever of finding the relevant amount plus the applicable accounting risk margin plus 3 percent per annum; that Unilever Philippines shall repay the principal amount of each Loan in full on the maturity date, or, if extended, on the extended maturity date, set forth in the relevant Confirmation; that Unilever Philippines shall pay interest on and for value the day on which interest becomes due; that any payments shall be made by Unilever Philippines in freely transferable and immediately available funds in the currency of the Loan at the bank to be designated by Unilever. DSITEH It is further represented that on March 18, 2010, Unilever issued a Loan Confirmation to Unilever Philippines pursuant to and subject to the terms and conditions of the Agreement; that the Loan amounts to US$131,000,000.00 to refinance an existing loan of Unilever Philippines that will mature on March 22, 2010; that the Loan can be drawn on March 22, 2010 and will mature on March 22, 2013; that the Loan bears interest at the rate of 2.50 percent per annum payable every 3 months from March 22, 2010 up to March 22, 2013; that based on the Certification issued by the Hong Kong and Shanghai Banking Corporation Limited 1 on April 28, 2010, an amount of US$105,000,000.00 (PHP4,836,150,000.00) was remitted to the account of Unilever Philippines on March 22, 2010, through telegraphic transfer, from the Royal Bank of Scotland N.V. in Amsterdam, the Netherlands; and that based on the Certificate of Inward Remittance issued by Deutsche Bank AG Manila Branch, 2 on April 22, 2010, an amount of US$26,000,000.00 (PHP1,185,366,000.00) was remitted to the account of Unilever Philippines on March 22, 2010, through telegraphic transfer, from the Royal Bank of Scotland N.V. It is finally represented that the interest subject of this 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, based on the Sworn Statement issued by the National Finance Director of Unilever Philippines on September 20, 2010. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that interest to be paid to Unilever , being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent, thus: "Section 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; xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such interest may be exempt from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. xxx xxx xxx" Relative thereto, you cite the Philippines-Netherlands tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide: "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 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: ITADaE a) 10 per cent 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. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. 4. 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. xxx xxx xxx" Under paragraph 2 of Article 11, interest arising in the Philippines and derived by a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent of the gross amount of the interest if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, 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 (b) 15 percent of the gross amount of the interest in all other cases. Under paragraph 3, such interest is exempt if it is paid in respect of a bond, debenture or other similar obligation of the government of the Philippines, or a political subdivision or a local authority of the Philippines, or if the interest is paid in respect of a loan made, guaranteed, or insured by the government of the Netherlands, the central bank of the Netherlands, or any agency or instrumentality (including a financial institution) owned or controlled by the government of the Netherlands. The term "interest" 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 are not regarded as interest for the purpose of Article 11. Accordingly, since the interest is not paid in connection with the sale on credit of any industrial, commercial or scientific equipment, and since the interest is not paid in respect of public issues of bonds, debentures or similar obligations, such interest (except default interest which is not covered by Article 11) to be paid by Unilever Philippines to Unilever pursuant to the Master Loan Agreement and the Loan Confirmation is subject to income tax at the rate of 15 percent of the gross amount thereof. (BIR Ruling No. ITAD 66-10 dated November 30, 2010) HcACST With respect to default interest (penalty charges or interest on late payment), since the Philippines-Netherlands tax treaty excludes this type of income from the application of Article 11 and since the treaty does not contain an article on Other Income, such default interest to be paid by Unilever Philippines to Unilever is subject to income tax at the regular rate of 20 percent of the gross amount thereof. Finally, under Section 179 of the Tax Code, as amended, the Loan Confirmation, being debt instruments, are subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the amount of the loans subject of these instruments, thus: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." 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. aIEDAC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Situated at 7th Floor, HSBC Centre, 3058 Fifth Avenue West, Bonifacio Global City, Taguig City, Philippines. 2. Situated at 26th Floor, Ayala Tower One, Ayala Triangle, Makati City, Philippines.