ITAD BIR Ruling No. 323-11

December 19, 2011 ITAD BIR RULING NO. 323-11 Article 11, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-66-10 Hoya Glass Disk Philippines, Inc. 111 East Main Avenue, SEPZ Laguna Technopark, Bian, Laguna, Philippines Attention: Wilson P. Obrero President Gentlemen : This refers to your tax treaty relief application filed on March 29, 2011 on behalf of HOYA HOLDINGS (ASIA) B.V. ("HHBV"), requesting confirmation that interest payments of HOYA GLASS DISK PHILIPPINES, INC. ("HGDP") to HHBV are subject to the preferential tax rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that HHBV, with address at Amsterdamseweg 29 1422 AC Uithoorn, The Netherlands, is a private company with limited liability registered and incorporated under the laws of The Netherlands, and is a resident thereof within the meaning of the Philippines-Netherlands tax treaty, as evidenced by a Deed of Demerger including Incorporation between Hoya Holdings N.V. and HHBV and the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on February 11, 2011; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission on April 1, 2011; and that HGDP, on the other hand, is a corporation duly organized and existing under the laws of the Philippines. It is further represented that to enable HGDP to carry out its business activities, to meet various costs and expenses incurred in the ordinary course of its business and to establish new factory of display cover glass, it entered into several Loan Agreements with HHBV on various dates whereby HHBV has agreed to lend HGDP funds under credit facility, as follows: TAcSCH Date of Loan Amount Interest rate Repayment Agreement Schedule for the Loan March 12, 2010 EURO5,857,000 1.618% per annum September 30, 2011 April 16, 2010 USD12,000,000 1.33% per annum September 30, 2011 June 18, 2010 USD4,000,000 1.43875% per annum July 29, 2011 July 19, 2010 USD20,000,000 1.368% per annum September 30, 2011 July 19, 2010 USD3,500,000 1.395% per annum July 29, 2011 August 27, 2010 USD5,000,000 1.14425% per annum August 30, 2011 September 27, 2010 USD7,000,000 0.976% per annum June 29, 2012 November 22, 2010 USD20,000,000 1.0074% per annum December 29, 2011 December 17, 2010 USD10,000,000 1.0629% per annum March 30, 2012 January 20, 2011 USD10,000,000 1.0451% per annum March 20, 2012 February 9, 2011 USD3,500,000 1.0355% per annum February 8, 2012 February 22, 2011 USD12,000,000 1.1375% per annum June 29, 2012 March 24, 2011 USD15,000,000 1.0493% per annum September 28, 2012 It is also represented, as shown in several bank statements issued by Mizuho Corporate Bank, Ltd.-Manila branch, and, the Bank of Tokyo-Mitsubishi UFJ-Manila branch, that on different dates, the above amounts were remitted by HHBV with HGDP as beneficiary. It is finally represented, per the Sworn Statement executed by the President of HGDP on March 29, 2011, that the transaction subject of the above 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 a judicial appeal of the taxpayers involved. DHITCc In reply, please be informed that interest income derived in the Philippines by a nonresident foreign corporation is generally taxable under Section 28 (B) (5) [a] of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides: "SEC. 28. Rules 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 from income tax 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: 1 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-Netherlands tax treaty, which you invoked, may apply to the interest payments of HHBV to HGDP. Its Article 11 provides: "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, b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; TAECaD b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State. 4. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraphs 2 and 3. 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 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 above provisions, interest on foreign loans which is generally taxable in the Philippines at the rate of 20 percent may qualify for a preferential rate not to exceed: (a) 10 percent of the gross amount thereof if it is paid with respect to the sale on credit of any industrial, commercial or scientific equipment, to a loan granted by a bank or a financial institution, or to public issues of bonds, debentures, or similar obligations; and (b) 15 percent of the gross amount of the interest in all other cases. But, such interest may be exempt if the interest is paid with respect to a bond, debenture, or other similar obligation of the Philippine government, or a political subdivision or a local authority of the Philippines, or with respect to a loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. In the instant case, the subject interests cannot be entitled to the lower preferential rate of 10 percent because such interests are neither paid with respect to the sale on credit of any industrial, commercial or scientific equipment, nor the loans granted by a bank or a financial institution, nor the interests paid with respect to public issues of bonds, debentures, or similar obligations. Also, the interests on the said loans cannot be exempt since the borrower is neither the Philippine government, a political subdivision or a local authority thereof, nor the Loan made, guaranteed, or insured by the Netherlands government, the central bank of the Netherlands, or an agency or instrumentality (including a financial institution) owned or controlled by the Netherlands government. IASCTD In view thereof, considering that HHBV, the beneficial owner of the subject interests, has no fixed place of business in the Philippines to which said interests may be effectively connected, this Office is of the opinion and so holds that the interests derived by HHBV from HGDP under the herein Loan Agreements are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to Article 11 (2) [b] of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-66-10 dated November 30, 2010) Moreover, said Loan Agreements entered into between HHBV and HGDP are 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.