ITAD BIR Ruling No. 232-15

July 27, 2015 ITAD BIR RULING NO. 232-15 Article 11, Philippines-France tax treaty Bernaldo Directo & Po Law Offices Unit 1807 Cityland Condominium 10, Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Street Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your tax treaty relief applications (TTRA) filed on December 6, 2011 requesting for confirmation that the interest payments on loans extended by Credit Agricole Corporate and Investment Bank through Credit Agricole Corporate and Investment Bank-Singapore Branch (hereinafter, "CACIB-SINGAPORE") to Philippine Distressed Asset Asia Pacific (SPV-AMC)1, Inc. (hereinafter, "SPV-AMC1") and Philippine Distressed Asset Asia Pacific (SPV-AMC)2, Inc. (hereinafter, "SPV-AMC2") are subject to preferential income tax rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty"). Basic Representations It is represented that CACIB-SINGAPORE is a foreign corporation with address at 168 Robinson Road 22-01 Capital Tower, Singapore; that CACIB-SINGAPORE is a branch of CACIB, a French corporation; that CACIB-SINGAPORE is considered a resident of France for tax treaty purposes based on the Certificate of Residence issued by the Inspector of the Tax Administration of France on November 25, 2011; that CACIB-SINGAPORE was previously granted authority to establish and operate an offshore banking unit in the Philippines (CACIB-Manila) but such authority has been terminated in a resolution issued by the Monetary Board of the Bangko Sentral ng Pilipinas dated November 29, 2012, based on the letter issued by the director of the Bangko Sentral ng Pilipinas on December 28, 2012; that on the other hand, SPV-AMC1 and SPV-AMC2 are both domestic corporations with business address at the 14th Floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue corner Paseo de Roxas, Makati City. It is further represented that CACIB-SINGAPORE, as creditor, entered into the following agreements: Date May 26, 2008 June 6, 2011 May 26, 2008 June 6, 2011 Debtor SPV-AMC1 SPV-AMC1 SPV-AMC2 SPV-AMC2 Agreement Loan Agreement Supplemental Loan Agreement Supplemental Loan Agreement Loan Agreement Principal Maximum Maximum Amount of US$5,000,000.00, loan broken down into US$8,700,000.00, two tranches: broken down into two tranches: a.) Tranche A: up a.) Tranche A: up to to US$1,203,459 US$2,159,860.96 b.) Tranche B: up b.) Tranche B: up to to US$3,796,541 US$6,540,139.04 Maturity 3 years from date Further extended 3 years from date of Further of drawdown until March 31, drawdown extended until 2012 June 6, 2012 Interest Rate Cost of Funds Cost of Funds ('COF') for the ('COF') for the applicable period applicable period plus the interest plus the interest margin margin Interest 800 bps Reduced to 400 800 bps Reduced to 400 Margin bps bps Interest 3 months 3 months period Cumulative If any amount of If any amount of interest interest remains interest remains unpaid at the end unpaid at the end of an interest of an interest period, period, the lender the lender can at its can at its own own discretion agree discretion agree to capitalize the to capitalize the amount of interest amount of interest due and subject it the due and subject it interest rate and the interest rate margin applicable to and margin the principal of the applicable to the loan principal of the loan Date of First June 28, 2012 for the period covering December 5, 2011 for the period payment/s of March 30 to June 29, 2012 covering September 6 to December interest based 6, 2011 on the September 27, 2012 for the period Certification covering June 29 to September 28, 2012 issued by the Bank of the Philippine Islands on April 8, 2013 and that the following are the shareholdings of CACIB-SINGAPORE in: SDHTEC Domestic Corporation SPV-AMC1 SPV-AMC2 No. of Shares 124,999,995 49,999,998 Amount PhP124,999,995 PhP49,999,998 Percentage of ownership 99.99% 39.99% It is finally represented that the interest derived by CACIB-SINGAPORE from the loans is not effectively connected with CACIB-Manila and that the accruing interest thereon does not form part of the assets of CACIB-Manila based on the confirmation letter issued by CACIB-SINGAPORE on October 29, 2014. Ruling A. On income tax In reply, please be informed Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides: "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; xxx xxx xxx" However, the same may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code 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. xxx xxx xxx" Relative thereto, you invoke the Philippines-France tax treaty . Article 11 thereof provides: "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 law 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 amount of the interest. AScHCD 3. Notwithstanding the provisions of paragraph 2, a) Interest arising in a Contracting State and paid to a resident of the other Contracting State in respect of a bond, debenture or other similar obligation of the government of the first-mentioned Contracting State or a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other Contracting State; b) Interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: (i) in the case of France, the Banque francaise du commerce exterieur BFCE or the Compagnie francaise d' assurance pour le commerce exterieur COFACE; and (ii) in the case of the Philippines, the Central Bank of the Philippines or such lending institution as is specified and agreed in letters exchanged between the competent authorities of the Contracting States; c) the Philippine tax on interest arising in the Philippines in respect of public issues of bonds, debentures or similar obligations and paid by a company which is a resident of the Philippines to a resident of France shall not exceed 10 per cent of the gross amount of the interest. 4. 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 bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient 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 perform in that other State professional services from a fixed base situated therein and the debt claims in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. . . ." Under paragraph 2 of Article 11, interest arising in the Philippines and paid to a resident of France may be subject to income tax in the Philippines, but the rate of income tax that may be imposed thereon shall (a) not exceed 15 percent of the amount of the interest or (b) exempt if: i. the interest is paid in respect of a bond, debenture or other similar obligation of the government of France or a political subdivision or local authority thereof, ii. it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by Banque francaise du commerce exterieur BFCE or the Compagnie francaise d' assurance pour le commerce exterieur COFACE. Accordingly, the interest payments made by SPV-AMC1 and SPV-AMC2 to CACIB-SINGAPORE under the Agreements are subject to income tax in the Philippines at the rate of 15 percent of the gross amount thereof pursuant to paragraph 2 of Article 11 of the Philippines-France tax treaty. The interest payments cannot be exempt since the interests are not paid in respect of a bond, debenture or other similar obligation of the government of France or a political subdivision or local authority thereof, nor is it paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by Banque francaise du commerce exterieur BFCE or the Compagnie francaise d' assurance pour le commerce exterieur COFACE. AcICHD B. On documentary stamp tax Finally, the Loan Agreements are subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended, which provides: "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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue