ITAD BIR Ruling No. 226-13

August 15, 2013 ITAD BIR RULING NO. 226-13 Article 11, Philippines-Malaysia tax treaty Punongbayan & Araullo 19th and 20th Floors, Tower 1 The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Mr. Edward L. Roguel Partner, Tax Advisory & Compliance Gentlemen : This refers to your tax treaty relief application filed on December 28, 2012, on behalf of your client, OPIF Corporation ("OPIF") ,requesting confirmation that interests paid by Philippine Asset Growth One, Inc. ("PAGO") to OPIF are subject to a preferential tax rate of 15 percent pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Malaysia tax treaty"). HAICET It is represented that OPIF is a foreign corporation organized and existing under the laws of Malaysia and resident thereof based on the Certificate of Status of Tax Residence issued by the Inland Revenue Board of Labuan, Malaysia, on January 14, 2013; that OPIF is situated at Brumby Centre, Lot 42, Jalan Muhibbah, 8700 Labuan F.T. Malaysia; that OPIF is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on January 18, 2013; that, on the other hand, PAGO is a domestic corporation situated at 16th Floor, Robinsons Summit Center, 6783 Ayala Avenue, Makati City, Philippines. It is further represented, that on February 15, 2013, OPIF and PAGO entered into a Participating Loan Agreement ("PLA"). OPIF agrees to lend to PAGO the aggregate amount equal to the Dollar Equivalent of P174,155,732.30 subject to loan interest rate of 12 percent per annum. PAGO may request a Disbursement by delivering to OPIF, at least 5 local business days prior to the proposed date of Disbursement, a Disbursement request substantially in a prescribed form. Interest on any Disbursement, or as the case may be, on the loan shall accrue from day to day and be calculated on the basis of a 360-day year for the actual number of days in the relevant Interest Period 1 and be payable in arrears on the Interest Payment Date immediately following the end of the Interest Period. 2 If the Disbursement is made less than 15 days before an Interest Payment Date, interest on that Disbursement shall be payable on the second Interest Payment Date following the date of Disbursement. It is further represented that PAGO received an inward remittance from OPIF under the following details: Date of Remitter Reference No. USD Amount Exchange Rate PHP Amount Remittance Remitted Credited to Account Net of Charges 28 Feb. 13 TMF 2013022788876178 USD4,867,171.00 USD1.00/PHP40.64 PHP197,801,829.44 TRUSTEES MALAYSIA BERHAD On April 15, 2013 PAGO remitted funds to TMF TRUSTEES MALAYSIA BERHAD OPIF CORPORATION by means of Telegraphic Transfer with the following details: EICSD Date of Remittance Reference USD Amount 15 April 2013 SPTTRS3105965402 USD906,880.56 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 Certification issued by Mr. Jason Chen, Director of OPIF on November 27, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, provides that interest to be paid to OPIF, 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: DITEAc "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 invoke the Philippines-Malaysia tax treaty. Paragraphs 1, 2, 3, 4, 5 and 6, 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 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 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest paid to a resident of the Philippines on an approved loan or a long-term loan shall be exempt from Malaysian tax. 4. Notwithstanding the provisions of paragraphs 2 and 3, the Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived by the Government from that other State. IcDHaT 5. For purposes of paragraph 4, the term 'Government': a) in the case of Malaysia means the Government of Malaysia and shall include: (i) the governments of the states; (ii) the local authorities; (iii) the Bank Negara Malaysia; (iv) such institutions, the capital of which is wholly owned by the Government of Malaysia or the governments of the states or the local authorities, as may be agreed from time to time between the competent authorities of the Contracting State. b) in the case of the Philippines means the Government of the Republic of the Philippines and shall include: (i) the Central Bank of the Philippines; (ii) such institutions, the capital of which is wholly owned by the Government of the Republic of the Philippines, as may be agreed upon from time to time between the competent authorities of the Contracting States. 6. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or 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 according to the taxation laws of the Contracting State in which the income arises. xxx xxx xxx" Under paragraph 2 of Article 11, interest arising in the Philippines and derived by a resident of the Malaysia is subject to Philippine income tax at the rate of 15 percent of the gross amount of the interest. Under the succeeding paragraphs 3, 4 and 5, such interest is even exempt from Philippine income tax if it is paid in respect of a bond, debenture or other similar obligation of the government of the Philippines, or the Central Bank of the Philippines, or such institutions owned or controlled by the government of the Philippines or if the interest is paid in respect of a loan made, guaranteed, or insured by the government of the Malaysia, local government authorities of the Malaysia, the bank Negara of Malaysia or such institutions owned or controlled by the government of the Malaysia. DcCASI Accordingly, since the interest is not derived by the Government of Malaysia, and other qualified entities, such interest paid by PAGO to OPIF, is subject to income tax at the rate of 15 percent of the gross amount thereof. Finally, Section 179 of the Tax Code, as amended, provides that the Participating Loan Agreement, being debt instrument, 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. DCHaTc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Interest Period each period of three (3) months beginning on an Interest Payment Date and ending on the day immediately before the next following Interest Payment Date, except (i) in the case of the first period applicable to each Disbursement when it means the period beginning on the date on which that Disbursement is made and ending on the day immediately before the next following Interest Payment Date and (ii) in the case of the final Interest Period, when it means the period beginning on the Interest Payment Date immediately prior to the Final Repayment Date and ending on the Final Repayment Date. 2. Interest Payment Date January 15, April 15, July 15 and October 15 in any year.