ITAD BIR Ruling No. 327-12

September 3, 2012 ITAD BIR RULING NO. 327-12 Article 10, Philippines-UK tax treaty Sycip Gorres Velayo and Co. 6750 Ayala Avenue Makati City, Philippines Attention: Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on February 23, 2011 requesting confirmation that interest to be paid by Sony Philippines, Inc. ("SPI") to Sony Global Treasury Services Plc. ("SGT") is subject to income tax in the Philippines at the rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty") . 1 Basic Facts It is represented that SGT is a company duly organized and existing under the laws of the United Kingdom per its Memorandum and Articles of Association; that the primary purpose of SGT, among others, is to lend money on any terms that may be thought fit to Sony Corporation and any of its subsidiaries or affiliates, and to give any guarantees that may be deemed expedient; that SGT has its registered office at The Heights, Brooklands, Weybridge, Surrey, KT13 OXW, England; that SGT is a resident of the United Kingdom for purposes of the Philippines-UK tax treaty as certified by the UK's HM Revenue and Customs, on December 6, 2010; that SGT is not registered 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 ("SEC") on September 21, 2010; that, on the other hand, SPI is a corporation organized and existing under the laws of the Philippines with principal office at 11th Floor, Marajo Tower, 26th Street West corner 4th Avenue, Bonifacio Global City, Taguig; that SPI is engaged in the business of selling, manufacturing, procuring, and providing repair services for products and other products bearing the trademark "Sony" and in the business of importation and selling of consumer type electronic products bearing the trademark "Aiwa"; and that, as per certification issued by the Corporate Secretary of SPI, SGT does not hold ownership in the outstanding capital of SPI. Moreover, it is represented that SGT and SPI entered into a Short Term Master Loan Agreement ("Loan Agreement") whereby SGT agreed to provide a loan to SPI on a short term basis, from time to time. The Loan Agreement was signed by SPI on January 20, 2010, while SGT signed the same on February 1, 2010. In a letter dated May 7, 2010, the Bangko Sentral ng Pilipinas ("BSP") advised SPI that the Monetary Board, under its Resolution No. 589 dated April 29, 2010 approved the intercompany loan facility of SGT and SPI covered by the Loan Agreement, under the following terms: Amount of Loan: US$30 million Lender: Sony Global Treasury Services PLC, United Kingdom (SGTS UK) Type of Facility: Short-term Revolving Facility Covering Agreement: Short Term Master Loan Agreement dated January 20, 2010 and February 1, 2010 Purpose: To fund importation of electronic products Maturity: Within two (2) weeks to one (1) month depending on Sony's requirements with an option to roll-over monthly Interest Rate: SGTS UK funding cost plus 0.775 percent per annum. The base rate depends on the tenor of loan availment Effectivity of the Loan Agreement: Start Date January 15, 2010 End Date a) Upon termination by either party by giving two months prior written notice to the other party; or b) If the borrower ceases to be wholly owned (directly or indirectly) by Sony Corporation of Japan Other Expenses All costs and expenses incurred under the Short Term Master Agreement are for the account of the Borrower Taxes For the account of the borrower It is also represented that pursuant to the Loan Agreement, SPI made the following drawdowns: Date Amount Total-to-Date 29 June 2010 US$4,000,000.00 US$4,000,000.00 17 September 2010 US$3,500,000.00 US$7,500,000.00 17 November 2010 US$2,500,000.00 US$10,000,000.00 15 December 2010 US$6,500,000.00 US$16,500,000.00 18 January 2011 US$6,000,000.00 US$22,500,000.00 That as of January 18, 2011, the unpaid outstanding balance amounts to US$18,500,000.00 with an interest of US$18,088.09 due as of even date; and that the submitted Certification issued by The Hong Kong and Shanghai Banking Corporation Limited on April 18, 2012 shows that interests on the subject loan were paid by SPI to SGT, as follows: Date Amount Source 16 March 2011 USD15,577.51 FX Transaction with Sony Phil under reference SPPTRS1073022001 16 March 2011 USD23,500,000.00 Transfer from Sony Philippines 18 April 2011 USD25,020,063.54 Transfer from Sony Philippines 18 May 2011 USD25,017,598.54 Transfer from Sony Philippines 15 June 2011 USD16,081.52 FX Transaction with Sony Phil under reference SPPTRS11165023501 15 June 2011 USD25,000,000.00 Transfer from Sony Philippines 19 July 2011 USD22,500,000.00 Transfer from Sony Philippines 19 July 2011 USD17,405.02 FX Transaction with Sony Phil under reference SPPTRS1200009001 18 August 2011 USD21,000,000.00 Transfer from Sony Philippines 18 August 2011 USD14,302.31 FX Transaction with Sony Phil under reference FWDTRS1228002801 15 September 2011 USD26,000,000.00 Transfer from Sony Philippines 15 September 2011 USD16,934.49 FX Transaction with Sony Phil under reference SPT112580257 18 October 2011 USD24,510,758.89 Transfer from Sony Philippines 16 November 2011 USD24,009,503.40 Transfer from Sony Philippines 15 December 2011 USD25,510,196.88 Transfer from Sony Philippines 18 January 2012 USD28,013,769.89 Transfer from Sony Philippines 15 February 2012 USD29,011,974.97 Transfer from Sony Philippines 15 March 2012 USD20,008,018.10 Transfer from Sony Philippines Total USD USD319,182,185.06 =============== It is finally represented that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Corporate Secretary of SPI dated January 27, 2011. Ruling In reply, please be informed that a foreign corporation like SGT, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code ("NIRC") of 1997, as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: DIAcTE xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In this case, since SGT is a resident of the United Kingdom for tax treaty purposes and is not engaged in trade or business in the Philippines based on the Certification of Non-Registration of Company issued by the SEC on September 21, 2010, such interest derived by SGT in the Philippines is generally subject to income tax at the rate of 20 percent pursuant to Section 28 (B) (5) (a) of the NIRC of 1997, which states: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (F) 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 NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It provides: "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." Hence, the provisions of Article 10 of the Philippines-UK tax treaty, which you invoked, may apply. It provides: EaHIDC "Article 10 INTEREST 1. Interest arising in a Contracting State which is derived and beneficially owned by 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 law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations. 4. Notwithstanding the provisions of paragraphs 2 and 3 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: a) the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term "instrumentality" as used in this paragraph means any agency or entity created or organised by either Contracting Government in order to carry out governmental functions. aEACcS 5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other 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 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the interest arises, 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 13, as the case may be, shall apply. . . ." Paragraph 6 of Article 10 is not applicable in this case since SGT does not have a permanent establishment in the Philippines as defined under Article 5 of the Philippines-UK tax treaty 2 as can be gleaned from the Certification of Non-Registration of Company issued by the SEC dated September 21, 2010. Hence, the interests paid to SGT by SPI may be exempt from income tax or partially exempt if the conditions therefor prescribed by Article 10 of the Philippines-UK tax treaty are complied with. Under Article 10, interest arising in the Philippines and derived by a resident of the United Kingdom is subject to Philippine income tax at the rate of (a) 10 percent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations; or (b) 15 percent of the gross amount of the interest in all other cases. Such interest is even exempt from Philippine income tax if it is derived and beneficially owned by the Government of the United Kingdom, a political subdivision or local authority thereof or an instrumentality of the United Kingdom, or if the interest is paid in respect of a loan made, guaranteed, or insured by the government of the United Kingdom, or any agency or instrumentality (including a financial institution) owned or controlled by the government of the United Kingdom. EcHTDI Accordingly, any interest to be paid by SPI to SGT under the Loan Agreement is subject to Philippine income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) of the Philippines-UK tax treaty. Such interests to be paid cannot be subject to the lower rate of 10 percent under paragraph 3, or be exempt under paragraph 4, of Article 10, because the conditions laid down in availing either of these more preferential treatments are not satisfied in the case of the subject interest. Finally, the Loan Agreement, based on the amount actually drawn down, is subject to documentary stamp tax under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243, 3 as follows: "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. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." 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. DIEAHc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed on June 10, 1976, and effective January 23, 1978. 2. "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. . . ." 3. Entitled "An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for other Purposes," signed into law on February 17, 2004, and effective March 20, 2004.