ITAD BIR Ruling No. 289-12

July 17, 2012 ITAD BIR RULING NO. 289-12 Article 11, Philippines-Japan tax treaty; BIR Ruling No. ITAD 185-12 Nonato and Nonato Law Offices Room 406, Tulips Center A.S. Fortuna Street, Bakilid Mandaue City, Cebu Attention: Rester John L. Nonato Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on January 24, 2012 requesting confirmation that interest paid by Yamashin Cebu Filter Manufacturing Corporation ("Yamashin Cebu") to Yamashin Filter Corporation ("Yamashin") is subject to income tax at the rate of 10 percent pursuant to the 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 by a Protocol . 1 Facts Yamashin is a foreign corporation and a resident of Japan based on its Articles of Association and its Certificate of Residence issued by the Yokohamanaka Tax Office in Japan on January 24, 2012. Yamashin is located at 15th Floor, Nisseki-Yokohama Building, 1-1-8 Sakuragicho, Naka-ku, Yokohama, Nakagawa, Japan. It 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 24, 2012. On the other hand, Yamashin Cebu is a domestic corporation located at Mactan Ecozone 2, Special Economic Zone, Barangay Basak, Lapulapu City, Cebu, Philippines. On January 17, 2012, Yamashin Cebu and Yamashin entered into a Longterm Loan Agreement where Yamashin granted Yamashin Cebu a loan of 100,000,000.00 to finance the latter's acquisition of new machineries and other investments. The loan will be paid by making thirty-five equal monthly payments of 2,777,000.00 and one last payment of 2,805,000.00 beginning March 29, 2012 to February 15, 2015. The loan bears interest at the rate of 4 percent per annum payable monthly. The loan will be paid as follows: DCHIAS Date of Payment Amount of Principal Outstanding Principal Repaid (in Yen) Subject to Interest (in Yen) February 29, 2012 2 - 100,000,000.00 March 29, 2012 2,777,000.00 100,000,000.00 April 29, 2012 2,777,000.00 97,223,000.00 May 29, 2012 2,777,000.00 94,446,000.00 June 29, 2012 2,777,000.00 91,669,000.00 July 29, 2012 2,777,000.00 88,892,000.00 August 29, 2012 2,777,000.00 86,115,000.00 September 29, 2012 2,777,000.00 83,338,000.00 October 29, 2012 2,777,000.00 80,561,000.00 November 29, 2012 2,777,000.00 77,784,000.00 December 29, 2012 2,777,000.00 75,007,000.00 January 29, 2013 2,777,000.00 72,230,000.00 February 29, n 2013 2,777,000.00 69,453,000.00 March 29, 2013 2,777,000.00 66,676,000.00 April 29, 2013 2,777,000.00 63,899,000.00 May 29, 2013 2,777,000.00 61,122,000.00 June 29, 2013 2,777,000.00 58,345,000.00 July 29, 2013 2,777,000.00 55,568,000.00 August 29, 2008 2,777,000.00 52,791,000.00 September 29, 2013 2,777,000.00 50,014,000.00 October 29, 2013 2,777,000.00 47,237,000.00 November 29, 2013 2,777,000.00 44,460,000.00 December 29, 2013 2,777,000.00 41,683,000.00 January 29, 2014 2,777,000.00 38,906,000.00 February 29, * 2014 2,777,000.00 36,129,000.00 March 29, 2014 2,777,000.00 33,352,000.00 April 29, 2014 2,777,000.00 30,575,000.00 May 29, 2014 2,777,000.00 27,798,000.00 June 29, 2014 2,777,000.00 25,021,000.00 July 29, 2014 2,777,000.00 22,244,000.00 August 29, 2014 2,777,000.00 19,467,000.00 September 29, 2014 2,777,000.00 16,690,000.00 October 29, 2014 2,777,000.00 13,913,000.00 November 29, 2014 2,777,000.00 11,136,000.00 December 29, 2014 2,777,000.00 8,359,000.00 January 29, 2015 2,777,000.00 5,582,000.00 February 10, 2015 2,805,000.00 2,805,000.00 Total 100,000,000.00 ============ Based on the Certificate of Inward Remittance issued on February 14, 2012 by Rizal Commercial Banking Corporation-Mactan Economic Processing Zone 2 Branch, an amount of 100,000,000.00 (P54,315,000.00) was remitted on February 10, 2012 by Yamashin and credited to Yamashin Cebu 's account at that bank. Ruling Relative thereto, please be informed that paragraph 2, Article 11 of the amended Philippines-Japan tax treaty provides: "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." Under Article 11, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed 10 percent. Accordingly, since Yamashin, the recipient of the income, is a resident of Japan, such interest paid to it by Yamashin Cebu under the Longterm Loan Agreement shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the amended Philippines-Japan tax treaty. (BIR Ruling No. ITAD 185-12 dated May 3, 2012) Furthermore, under Section 179 of the National Internal Revenue Code of 1997, as amended, the Longterm Loan Agreement is subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of the loan (P54,315,000.00), 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." 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. EADCHS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending the 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 effective January 1, 2009. 2. Since the TTRA was filed on January 24, 2012 and interest subject thereof will be paid later beginning February 29, 2012, such interest paid on that date and thereafter shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") ,to wit: " Section 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. " (Emphasis ours) n Note from the Publisher: Copied verbatim from the official copy.