ITAD BIR Ruling No. 299-14

October 13, 2014 ITAD BIR RULING NO. 299-14 Article 11, Philippines-France Tax Treaty Nisce Mamuric Guinto Rivera and Alcantara Law Offices Unit 804, 139 Corporate Center 139 Valero St., Salcedo Village Makati City Attention: Atty. Jose Roberto L. Mamuric Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on December 19, 2011 requesting confirmation that the interest derived by Air Liquide Finance ("ALF") from the loan it extended to Air Liquide Pipeline Utilities Services, Inc. ("ALPUSI") is subject to 15 percent preferential tax rate 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"). It is represented that ALF, with office address at 6 Rue Cognacq Jay, 75007 Paris, France, is a foreign corporation organized and existing under the laws of France and a resident thereof per the Certificate of Residence issued by the French Tax Authority dated April 25, 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 December 22, 2010; and that, on the other hand, ALPUSI is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at Asahi Compound, M.H. del Pilar Street, Pinagbuhatan, Pasig City. It is further represented that on September 6, 2011, ALF and ALPUSI entered into an Agreement for a Term Loan ("Agreement") in the amount of US$33,000,000.00 commencing on September 15, 2011 to September 21, 2020, with interest rate of USD Libor 3 months plus a margin of 3.10%; and that the repayment of loan shall start on March 20, 2015. It is further represented, based on the Certificate of Inward Remittance of Foreign Exchange No. 2011-60115-0080 issued by the CitiBank N.A. Manila ("CitiBank") on December 15, 2011, that CitiBank received an inward remittance of foreign exchange for ALF in the amount of US$4,500,000.00. It is finally represented, that as of December 9, 2011, ALF is not a shareholder of ALPUSI; and that based on the Sworn Statement by the same Corporate Secretary on December 19, 2011, 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. cCHITA 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. TaIHEA xxx xxx xxx" In relation thereto, Article 11 of the Philippines-France 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 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. 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 DSHTaC (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. xxx xxx xxx" Based on the above provisions, interest arising in the Philippines derived by a resident of France who is the beneficial owner of interest is taxable at 15 percent. However, under paragraph 3, such interest is exempt from income tax if the interest is paid in respect of a bond, debenture or other similar obligation of the government of the Philippines or a political subdivision or local authority or if paid in respect of a loan made, guaranteed or insured or a credit extended, guaranteed or insured (i) in case of France, the Banque francaise du commerce exterieur BFCE or the Compagnie francaise d' assurance pour le commerce exterieur COFACE and (ii) the Central Bank of the Philippines in case of the Philippines. Interest arising in the Philippines paid in respect of public issues of bonds, debentures or similar obligations and paid a resident of France shall not exceed 10 per cent of the gross amount of the interest. Accordingly, since the lender of the subject loan is not a qualified institution, this Office is of the opinion that the interest to be earned by ALF from the subject loan is subject to 15 percent of the gross amount of interest pursuant to Article 11 (2) of the Philippines-France tax treaty. CSHEca Moreover, the Agreement shall be subject to documentary stamp tax imposed under Section 179 of Tax Code of 1997, as amended. 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