ITAD BIR Ruling No. 302-14

October 13, 2014 ITAD BIR RULING NO. 302-14 Article 11, Philippines-Japan tax treaty, as amended Transnational Diversified Corporation The Penthouse, Net Quad Building 4th Avenue corner 30th Street, E-Square Crescent Park West Bonifacio Global City Taguig City Attention: Atty. Millicent L. Sim-Asuncion Chief Legal Counsel and Corporate Secretary Gentlemen : This refers to your tax treaty relief application filed October 1, 2012, on behalf of SUMITOMO MITSUI TRUST BANK, LTD. ("SMTB") requesting confirmation that the interest paid by NYK TRANSNATIONAL LAND CORPORATION ("NYK") to SMTB is subject to 10 percent final withholding tax pursuant to 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"). It is represented that SMTB, with principal office located at 1-4-1 Marunouchi, Chiyoda-ku, Tokyo, 100-8233, Japan is a corporation organized and existing under the laws of Japan and is a resident of Japan per Certification by the Tax Authorities of the Country of Residence of the Lender issued by the District Director of Kojimachi Tax Office on August 22, 2012; that SMTB is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 29, 2012; and that, on the other hand, NYK is a domestic corporation situated at 9 Gen. Luna corner Sta. Potenciana Sts., Intramuros, Manila engaged in the realty business. It is also represented that on September 28, 2012, a Facility Loan Agreement ("Agreement") was entered into by and among NYK-FIL Ship Management, Inc., NYK-FIL Maritime E-Training, Inc., NKY-Transnational Properties Corp., and NYK, as borrowers and SMTB, as lender; that NYK is the Tranche F Borrower in the Agreement up to amount of US$2,500,000.00 for land development and investment for water, electrical distribution and fire protection system for the period starting October 2, 2012 to July 31, 2013 to mature 10 years from consolidation date with interest spread of 0.56% per annum; that the interest rate based according to the USD LIBOR published by the British Bankers Association at 11 o'clock AM (London Time); that based on BDO Remittance Inquiry on February 18, 2012, NYK received inward remittances from SMTB amounting to US$7000,000.00; that interest payment for loan in the amount of USD1,323.90 was remitted by NYK to SMTB on May 10, 2013. It is finally represented based on the Sworn Statement issued by the NYK on September 25, 2012, that the interest subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. EICSTa In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28, paragraph B (1) (5) (a) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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;" However, said interest income may be exempt 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: "SEC. 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." Accordingly, Article 11 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the interest payments of NYK to SMTB. It 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. TAacHE 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. xxx xxx xxx 5. 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. 6. The provisions of paragraphs 1, 2 and 3 above 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 Contracting 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. HTacDS xxx xxx xxx" Based on the above provisions, interests on foreign loans are generally taxable in the Philippines at the rate of 20 percent. However, interests 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. Such being the case, considering that SMTB is a resident of Japan which does not have any permanent establishment in the Philippines, interest income derived by SMTB from its Agreement with NYK shall be subject to a preferential tax rate of 10 percent of its gross amount, pursuant to Article 11 (2) of the Philippines-Japan tax treaty, as amended. Moreover, the Loan Agreement entered into between NYK and SMTB 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 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