ITAD BIR Ruling No. 298-14

October 13, 2014 ITAD BIR RULING NO. 298-14 Article 11, Philippines-Denmark Tax Treaty Vestas Services Philippines, Inc. 31st/F RCBC Plaza Tower II Sen. Gil Puyat Avenue corner Ayala Avenue Makati City 1226 Attention: Ms. Maria Lea N. Alfaro Finance Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on December 28, 2012 requesting confirmation that the interest derived by Vestas Wind Systems A/S ("VWSA") from the loan it extended to Vestas Services Philippines, Inc. ("VSPI") is subject to 10 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Denmark tax treaty"). It is represented that VWSA, with office address at Alsvej 21, 8940 Randers SV, Denmark, is a corporation organized and existing under the laws of Denmark and is a resident thereof per the Certificate of Residency issued by the Denmark Tax Authority dated September 21, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 21, 2011; and that, on the other hand, VSPI is a corporation duly organized and existing under the laws of the Philippines, with office address at 31st/F RCBC Plaza Tower II, Sen. Gil Puyat Avenue corner Ayala Avenue, Makati City. It is further represented that on September 26, 2012, VWSA and VSPI entered into a Loan Agreement in the maximum amount of US$3,000,000.00, with interest rate of one month LIBOR + 1.000% calculated on the basis of actual days/360 to commence from the release date of the loan; that the interest is payable not later than 20th of the following month; that the loan will be repaid in full no later than 5 years from the execution date; and that based on the Certificate of Inward Remittance issued by JP Morgan on December 19, 2019, JP Morgan received an inward remittance of foreign exchange for VSPI in the amount of US$2,399,965.00 on December 12, 2012. It is also represented, that as of September 25, 2012, VWSA is the owner of 93,362 shares in VSPI with a per value of Php9,335,700.00 representing 99.99% of the outstanding shares of VSPI; that based on the Sworn Statement by the authorized representative of VWSA on September 26, 2012, that the transaction subject of the request for 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 of the taxpayer/s involved; and that per Affidavit issued by VSPI on January 9, 2013, VSPI remitted interest payment to VWSA on January 7, 2013 by Funds Transfer Initiation Transaction Detail Report. TDCaSE In reply, please be informed that interest income on foreign loans received by a nonresident foreign corporation is generally governed by Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, by Republic Act No. 9337. It provides: "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. xxx xxx xxx (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 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. CHcTIA xxx xxx xxx" In relation thereto, Article 11 of the Philippines-Denmark tax treaty which you invoked may apply to the instant case. It 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 also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this limitation. 3. Notwithstanding the provisions of paragraphs 1 and 2, interest arising in a Contracting State and paid in respect of a loan made by or guaranteed or insured by the Government of the other Contracting State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. 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 such securities, 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 and 2 shall not apply if the beneficial owner 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 performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. aHSTID xxx xxx xxx" Based on the above provisions, interest arising in the Philippines derived by a resident of Denmark and beneficial owner of interest is taxable at 10 percent. However, under paragraph 3, such interest is exempt from income tax if the interest if paid in respect of loan made or guaranteed or insured by the government or any agency or instrumentality owned or controlled by the government. Such being the case, considering that the beneficial owner of the interest is VWSA, a resident of Denmark with no fixed place of business in the Philippines, and the said interest is not paid in respect of loan made or guaranteed or insured by the government or any agency or instrumentality owned or controlled by the government, this Office is of the opinion and so holds that interests paid to VWSA pursuant to the subject Agreement are subject to a preferential tax rate of 10 percent of its gross amount, pursuant to Article 11 (2) of the Philippines-Denmark tax treaty. Moreover, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of Tax Code of 1997, as amended at the rate of one peso (Php1.00) on each two hundred pesos (Php200.00) or fractional part thereof, of the issue price of the contract. 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 Bureau of Internal Revenue