ITAD BIR Ruling No. 308-11

December 2, 2011 ITAD BIR RULING NO. 308-11 Article 11, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 32-10; BIR Ruling No. ITAD 22-10; BIR Ruling No. ITAD 20-10 SGV & CO. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Antonette C. Tionko Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on March 1, 2011, on behalf of Daiwa Securities Capital Markets Co., Ltd. ("Daiwa") , requesting confirmation that interest paid by the Bureau of Treasury of the Philippines ("Bureau of Treasury") to Daiwa is subject to a preferential tax rate 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 effective January 1, 2009. It is represented that Daiwa is a corporation organized and existing under the laws of Japan based on its Corporate Registration issued by the Registrar of the Tokyo Legal Affairs Bureau in Japan on February 3, 2011 and on the Certificate of Residence issued by Kojimachi Tax Office in Japan on February 14, 2011; that Daiwa is situated at Gran Tokyo North Tower 9-1, Marunouchi I-Chome, Chiyoda-ku, Tokyo, Japan; that Daiwa 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 February 9, 2011; and that, on the other hand, Bureau of Treasury is a government financial institution situated at Palacio Del Gobernador Building, Intramuros, Manila, Philippines. It is further represented that Daiwa bought a Philippine Government Bond (PIBD0511C622) with nominal value of the bond amounting to P255,000,000.00 with an interest rate of 8.5 percent per annum through Citibank N.A.-Manila Branch, based on the Certification issued by the Securities and Fund Services of Citibank-Manila Branch on February 17, 2011; and that the said bond has a maturity date of March 3, 2011, which is also the date when Daiwa shall receive, or shall be paid, the interest income thereon. It is finally represented that the interest subject of this 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, based on the Sworn Statement issued by the Managing Director of Daiwa on February 18, 2011. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that interest to be paid to Daiwa , being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent, thus: DAaHET "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. (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 Code provides that such interest may be exempt or is subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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. xxx xxx xxx" Relative thereto, you invoke the Philippines-Japan tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide: "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: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. cSTHaE 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. . . ." The Protocol amended paragraphs 2 and 3 which now read: "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. AEIHaS 3. Notwithstanding the provisions of paragraph 2, 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, insured 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. . . ." Based on the foregoing provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) before January 1, 2009, 10 percent if the interest is paid in respect of government securities, bonds or debentures, or if the interest is paid by a domestic company registered with the Board of Investments ("BOI") and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and 15 percent in all other cases; and (b) beginning January 1, 2009, 10 percent in all cases. Furthermore, such interest may be exempt if it is derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, or by any resident of Japan under certain conditions. CITDES Accordingly, since Daiwa is not one of the qualified entities mentioned in paragraph 3 of Article 11 of the treaty, such interest payable to Daiwa is subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD 32-10 dated August 27, 2010; BIR Ruling No. ITAD 22-10 dated August 25, 2010; and BIR Ruling No. ITAD 20-10 dated August 20, 2010) 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. cCTIaS 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.