ITAD BIR Ruling No. 311-13

December 2, 2013 ITAD BIR RULING NO. 311-13 Article 11 (Interests), Philippines-Netherlands tax treaty International Container Terminal Services, Inc. ICTSI Administration Building MICT South Access Road Port of Manila, Manila 1012 Attention: Atty. Raquel T. Ros Tax Compliance Manager Gentlemen : This refers to your tax treaty application ("TTRA'') filed on July 2, 2013, requesting confirmation that interest paid by International Container Terminal Services, Inc. ("ICTSI") to ICTSI Treasury B.V. ("ITBV") is subject to income tax at the rate of 15% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of the Netherlands with respect to Taxes on Income ("Philippines-Netherlands" tax treaty) . ITBV is a non-resident foreign corporation organized and existing under the laws of the Netherlands. It is a resident thereof within the meaning of Article 4 of the Convention for the avoidance of double taxation between the Philippines and the Netherlands, with principal address at Fred. Roeskestraat 123, 1076 EE, Amsterdam. It is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission on June 19, 2013. On the other hand, ICTSI, is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at ICTSI Administration Building, MICT South Access Road, Port of Manila, Manila. IaSAHC It is represented that on June 27, 2013, a Loan Agreement ("Agreement") was executed by and between ICTSI and ITBV whereby the latter agreed to extend to the former the amount of Three Hundred Million US Dollars (US$300,000,000.00) which shall earn interest at the rate of 4.735% per annum on the basis of the actual number of days elapsed and a year of three hundred sixty (360) days; and that ICTSI shall pay ITBV an interest on the loan starting July 16, 2013 up to and including January 16, 2023. It is also represented based on Certificate of Inward Remittance issued by Citibank N.A. on June 3, 2013 that on January 17, 2013 Citibank New York by order of ITBV remitted the amount of Two Hundred Ninety Three Million Four Hundred Ninety One Thousand US Dollars (US$293,491,000.00) to Citibank N.A. in favor of ICTSI and has been credited to ICTSI under US$ Savings Account No. 5/600313/012 on the same day. In compliance with ICTSI's debt obligation, on July 12, 2013 ICTSI through Citibank N.A. has effected an outward remittance to Citibank International PLC Netherlands Branch via Citibank New York the amount of Seven Million One Hundred Two Thousand Five Hundred (US$7,102,515.00) * in favor of ITBV. It has been debited from the account of ICTSI under Savings Account No. 5/600313/012 per Certificate of Outward Remittance issued by Citibank N.A. on July 30, 2013. It is further represented that ITBV is not a stockholder of ICTSI; and that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal per sworn certification dated June 25, 2013. STcADa In reply, please be informed that interest income derived by a nonresident foreign corporation is generally taxable under Section 28 (B) [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 . 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, under Section 32 (B) (5) of the Tax Code, said interest income may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: AHaDSI 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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1, 2 & 6 of Article 11 thereof provide: "Article 11 Interest 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that 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 if such interest is paid: i. in connection with the sale on credit of any industrial, commercial or scientific equipment; or ii. on any loan of whatever kind granted by a bank, or any other financial institution; iii. in respect of public issues of bonds, debentures or similar obligations. EScaIT b) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx 6. The provisions of paragraphs 1, 2 and 3 shall not apply if the recipient of the interest, being a resident of one of the States, carries on in the other State in which the interest arises, a trade or business through a permanent establishment situated therein, or performs in that other State professional 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 a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, interest income arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines at a rate not exceeding (a) 10 percent if the recipient of the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment or any loan granted by a bank or any other financial institution and of public issues of bonds, debentures or similar obligations; and (b) 15 percent in all other cases. However, the said 10% and 15% will not apply if the non-resident foreign corporation has a permanent establishment in the Philippines. caCTHI Accordingly, considering that ITBV is the beneficial owner of the interest income and does not have a permanent establishment in the Philippines to which the subject interest is effectively connected, this Office is of the opinion and so holds that the interest payments of ICTSI to ITBV are subject to income tax at the rate of fifteen percent (15%) of the gross amount of the interest, pursuant to Article 11 (2) (b) of the Philippines-Netherlands tax treaty. Furthermore, under Section 179 of the Tax Code, as amended, the loan agreement, being a debt instrument is subject to documentary stamp tax equivalent to P1.00 for every P200.00 or a fraction thereof of the total amount of the loan, to wit: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" 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. DIcSHE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue