ITAD BIR Ruling No. 220-12

May 30, 2012 ITAD BIR RULING NO. 220-12 Article 11, Philippines-Japan Tax Treaty, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on January 19, 2012, on behalf of Sakamoto Yakuhin Kogyo Co., Ltd. ("Sakamoto-Japan") , requesting that the interest paid to "Sakamoto-Japan by Sakamoto Orient Chemicals Corporation ("Sakamoto-Phil") are subject to final withholding tax at a rate of 10 percent of the gross amount thereof pursuant to Article 11 of 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 Sakamoto-Japan, with address at 2-6, Awaji-machi 1-chome, Chuo-ku, Osaka, Japan, 541-0047 is a corporation organized and existing under the laws of Japan, and is a resident thereof within the meaning of the Philippines-Japan tax treaty per the Certificate of Status of Taxable Person issued by the District Director of Higashi Tax Office dated December 7, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated January 11, 2012; and that, on the other hand, Sakamoto-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at 104 H.V. dela Costa, Makati City. It is further represented that on July 29, 2011, Sakamoto-Japan and Sakamoto-Phil entered into a Loan Agreement ("Agreement"), whereby Sakamoto-Japan agreed to lend to Sakamoto-Phil an amount not exceeding Two Hundred Million Japanese Yen (JPY200,000,000) to be used for the latter's construction of DG 3 Plant at CAIP located in Bauan, Batangas; that Sakamoto-Phil shall repay the loan for a period of five (5) years spread over ten (10) equal semi-annual installments, that is every 29th day of January and 29th day of July of each year; and that the payment of the loan, which has an interest rate of 2.11% per annum, will begin on January 29, 2014 up to July 29, 2018. It is finally represented, per the Sworn Statement issued on January 10, 2012 issued by Sakamoto-Phil, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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: ETDHSa "Section 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, 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, Article 11 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It states: "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 percent of the gross amount of the interest. xxx xxx xxx 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." Based on the above provisions, interest 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. However, the 10 percent tax rate shall not apply if the Japanese corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. In view of the foregoing, and considering that Sakamoto-Japan does not have permanent establishment in the Philippines to which the subject interests are effectively connected, this Office is of the opinion and so holds that the interest to be paid by Sakamoto-Phil to Sakamoto-Japan, is subject to Philippine income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. Moreover, the subject Loan Agreement entered into between Sakamoto-Japan and Sakamoto-Phil 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. SIEHcA 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue