ITAD BIR Ruling No. 239-12

June 6, 2012 ITAD BIR RULING NO. 239-12 Article 11, Philippines-Japan Tax Treaty, as amended; BIR Ruling No. ITAD-115-11 SGV & Co. 6760 Ayala Avenue Makati City Attention: Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 27, 2011, on behalf of Sanyo Denki Co., Ltd ("Sanyo Denki-Japan") , requesting confirmation that the interest payments of Sanyo Denki Philippines, Inc. ("Sanyo Denki-Phil") to Sanyo Denki-Japan are subject to the 10 percent preferential tax rate, 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"). ACTISD It is represented that Sanyo Denki-Japan , with address at 1-15-1, Kita-otsuka Toshima-ku, Tokyo, Japan, 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 issued by Toshima Tax Office dated June 3, 2011; that it is not registered either as a corporation or partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated April 8, 2011; and that, on the other hand, Sanyo Denki-Phil is a corporation organized and existing under the laws of the Philippines with principal address at No. 2 Block F-1 Subic Techno Park, Argonaut Highway, Boton Area, Subic Bay Freeport Zone, Olongapo City. It is further represented that on September 30, 2011, Sanyo Denki-Phil and Sanyo Denki-Japan entered into a Loan Agreement ("Agreement") whereby Sanyo Denki-Japan extended loan to Sanyo Denki-Phil in the amount of US$5,000,000.00, to be used by Sanyo-Denki-Phil for its working capital necessary for its operation; that the loan has an interest rate of 2% per annum, and shall be paid to Sanyo Denki-Japan on March 31, 2012 and September 30, 2012. It is finally represented, per the Certification issued on October 21, 2011 issued by Sanyo Denki-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: "Section 28. Rates of Income Tax on Foreign Corporations. (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;" CTDacA 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 per cent 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. ESCcaT In view of the foregoing, and considering that Sanyo Denki-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 payments by Sanyo Denki-Phil to Sanyo Denki-Japan , are 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. (BIR Ruling No. ITAD-115-11 dated April 11, 2011) Moreover, the subject Loan Agreement entered into between Sanyo Denki-Phil and Sanyo Denki-Japan 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. 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