ITAD BIR Ruling No. 308-14

October 16, 2014 ITAD BIR RULING NO. 308-14 Article 11, Philippines-UAE tax treaty Getz Pharma (Phils.), Inc. 2nd Floor Ortigas Bldg. Ortigas Avenue 1600 Pasig City Attention: Ms. Cherryl de Pili Accountant Mr. Isagani Bobis Finance Manager Gentlemen : This refers to your tax treaty relief application (TTRA) filed on 31 August 2010, on behalf of GETZ PHARMA INTERNATIONAL FZ-LLC ("GPI"), requesting confirmation that interest payments made to GPI by GETZ PHARMA (PHILS.), INC. ("GPPI") are subject to the preferential tax rate of 10 percent pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital ("Philippines-UAE tax treaty"). It is represented that GPI, with address at Executive Office No. 103, Building No. 3, 1st Floor DuBiotech Business Centre, Academic City, Dubai, United Arab Emirates, is a resident of the United Arab Emirates for the purpose of enjoying the benefits of the Philippines-UAE tax treaty, as certified by the Executive Director for International Financial Relations of the Ministry of Finance, United Arab Emirates on 22 August 2010; that it is not registered either as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission on 25 August 2010; and that, on the other hand, GPPI, with address at 2/Floor Ortigas Bldg., Ortigas Avenue 1600 Pasig City, is a corporation duly organized and existing under Philippines laws. It is further represented that on 02 February 2009, a Memorandum of Agreement was entered into by and between GPI and GPPI whereby both parties legally bind themselves to the following: 1. GPI, willing to lend for the working capital needs of GPPI, shall cause to swift wire transfer USD3,500,000.00 to the account of GPPI, in the following installment: a. 1st installment USD800,000.00 February 2009 IcEaST b. 2nd Installment USD800,000.00 March 2009 c. 3rd Installment USD800,000.00 April 2009 Balance Based on operating needs 2. GPPI shall pay back the principal and interest in scheduled payments in US Dollar currency: a. A semi-annual basis interest of 6% per annum of the principal commencing from the date the loan proceeds were received; b. GPPI shall wire transfer payments of principal as follows: i. USD200,000.00 March 2010 ii. USD200,000.00 September 2010 iii. USD400,000.00 March 2011 iv. USD400,000.00 September 2011 3. Apart from the above payments, other loan repayments will be made as per mutual consent of both the parties and can be made any time after December 2009 until December 2013. It is also represented, as shown in the four (4) Certificates of Inward Remittance (CIR) issued on 27 July 2009 and one (1) CIR issued on 21 October 2009, all by Mr. Nick Gonzales, Manager of the UnionBank of the Philippines, that the following amounts were remitted by GPI with GPPI as beneficiary: Date of Remittance Remitting Foreign Amount Remitted Country Code of Bank Remitter 1 02 March 2009 American Express $749,959.00 DUBAI UAE Bank N.Y. $49,959.00 2 22 April 2009 American Express $799,959.00 DUBAI UAE Bank N.Y. 3 16 March 2009 American Express $799,959.00 DUBAI UAE Bank N.Y. 4 06 July 2009 Standard Chartered $599,953.00 DUBAI UAE Bank N.Y. 5 12 August 2009 Standard Chartered $499,953.00 SHARJAH DUBAI AE Bank N.Y. Total Remittances $3,499,742.00 =========== It is further represented that the transaction subject of the above TTRA is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. However, GPPI has an existing Letter of Authority for the taxable year 2009 GPPI's first year of business operation per the Sworn Statement issued by the Finance Manager of GPPI on 08 October 2010. aHSCcE It is finally represented, per 10 May 2013 Certification issued by UnionBank, that GPPI remitted dollars to pay its loan obligations to GPI via electronic transfer to the latter's account at Commercial Bank of Dubai, as follows: Date Principal Interest Amount Remitted 1 01 October 2010 USD200,000.00 USD89,100.00 USD289,100.00 2 31 March 2011 USD400,000.00 USD83,700.00 USD483,700.00 3 28 October 2011 USD400,000.00 USD72,900.00 USD472,900.00 4 30 March 2012 USD62,100.00 USD62,100.00 5 15 November 2012 USD62,100.00 USD62,100.00 6 25 March 2013 USD62,100.00 USD62,100.00 Note: The difference of 10,714.39 from the approved loan amortization of USD472,985.61 dated 31 March 2011 was debited from the dollar account of the client with the Bank. In reply, please be informed that interest income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28, paragraph B, sub-paragraph 5 (a) of the 1997 National Internal Revenue Code (Tax Code), as amended. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations. 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 Tax Code 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: 1 HCSEIT 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, the Philippines-UAE tax treaty, which you invoked, may apply to the interest payments of GPI to GPPI. Its Article 11 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 shall, by mutual agreement, settle the mode of application of this limitation. xxx xxx xxx 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 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. . . ." (Underscoring supplied) HSaEAD Based on the above provisions, interest on foreign loans which are generally taxable in the Philippines at the rate of 20 percent, may qualify for a preferential rate of 10 percent of the gross amount thereof if the interest recipient UAE resident corporation is also the beneficial owner thereof. However, the 10 percent tax rate shall not apply if the UAE corporation has a permanent establishment in the Philippines and the subject interest income is effectively connected to the said permanent establishment. Accordingly, since GPI has no fixed place of business in the Philippines, and, is the beneficial owner of the interest subject of the herein Agreement, the interest payments of GPPI to GPI are subject to income tax at the preferential rate of 10 percent pursuant to paragraph 2, Article 11 of the Philippines-UAE tax treaty. Moreover, said Memorandum of Agreement entered into between GPI and GPPI 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 foregoing 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 of Internal Revenue Footnotes 1. TITLE II TAX ON INCOME.