ITAD BIR Ruling No. 196-15

June 3, 2015 ITAD BIR RULING NO. 196-15 Articles 11 (Interests) Philippines-Switzerland tax treaty Manabat Sanagustin & Co., CPAs 9/F KPMG Center 6787 Ayala Avenue Makati City Attention: Maria Carmela M. Peralta Authorized Representative Gentlemen : This refers to your tax treaty application ("TTRA") filed on June 27, 2013, requesting confirmation that interest paid by Unilever Philippines, Inc. ("ULP") to Unilever Finance International A.G. ("UFI") is subject to income tax at the rate of 10% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Swiss Confederation with respect to Taxes on Income ("Philippines-Switzerland" tax treaty). It is represented that UFI is a non-resident foreign corporation organized and existing under the laws of Switzerland and is a resident thereof within the meaning of Article 4 of the Philippines-Switzerland tax treaty, with principal address at CH-8200 Schaffhausen, Spitalstrasse 5, Switzerland; that it is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on January 29, 2013; and that, on the other hand, ULP is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 1351 United Nations Avenue, Manila. It is also represented that a Master Loan Agreement ("Agreement") was executed by and between UFI and ULP on 5 June 2013 where both agreed that they may from time to time enter into one or more transactions whereby ULP will borrow money from UFI; that each loan will be governed by the terms and conditions set forth in the Agreement and in the documents (Confirmation) exchanged between UFI and ULP confirming such loan; that each Confirmation shall set out the arm's length terms and conditions governing a loan, including without limitation the principal amount, interest rate, interest period, and maturity date of such loan; that interest shall be payable by ULP on the outstanding principal amount of each loan at such rate and on such interest payment dates as is agreed between UFI and ULP specified in the relevant Confirmation; and that to the extent that no interest payment date is specified, interest shall be due on the maturity date and shall be paid together with the repayment of the principal amount; that on June 5, 2013, a Confirmation was executed by UFI and ULP which covers a loan amount of Six Billion Thirty Million Twenty Thousand Pesos (PHP6,030,020,000.00) with a fixed interest rate at 3.173% and is payable every three months. It is further represented that on June 6, 2013, UFI remitted the amount of One Hundred Forty-Three Million Nine Hundred Twenty-Eight Thousand Two Hundred Ninety-Eight and 64/100 US Dollars (US$143,928,298.64) to HSBC-Taguig City in favor of ULP and has been credited under USD Account No. 001-710706-130 on the same day; that in compliance with ULP's debt obligation, on September 6, 2013 ULP through HSBC remitted to UFI the amount of One Million Four Hundred Thirty-Two Thousand Six Hundred Eighty-Seven and 98/100 US Dollars (US$1,432,687.98). It is also represented that UFI does not own shares in ULP as of March 13, 2013; and that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal per sworn certification dated March 8, 2013. 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: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (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, under Section 32 (B) (5) of the Tax Code, said interest income may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." For this purpose, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1, 2, 3 & 4 of Article 11 thereof provide: "Article 11 Interest 1. Interest arising in a Contracting State and paid to 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 laws of that 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. 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, as well as income assimilated to income from money lent by the taxation laws 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. 4. The provisions of paragraphs 1 and 2 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 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 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, interest income arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not exceeding 10 percent if the recipient is the beneficial owner of the interest. However, the 10% tax rate shall not apply if UFI has a permanent establishment in the Philippines. Accordingly, considering that UFI is the beneficial owner of the interest income and does not have a permanent establishment in the Philippines to which the subject interest is effectively connected, this Office is of the opinion and so holds that the interest payments of ULP to UFI are subject to income tax at the rate of ten percent (10%) of the gross amount of the interest, pursuant to Article 11 (2) of the Philippines-Switzerland tax treaty. Furthermore, under Section 179 of the Tax Code, as amended, the loan agreement, being a debt instrument is subject to documentary stamp tax equivalent to P1.00 for every P200.00 or a fraction thereof of the total amount of the loan, to wit: "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. xxx xxx xxx" 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