ITAD BIR Ruling No. 328-11

December 21, 2011 ITAD BIR RULING NO. 328-11 Article 11 (Interest), Philippines-Korea tax treaty; Section 179, Tax Code of 1997, as amended; BIR Ruling No. ITAD 008-11; BIR Ruling No. ITAD 012-09; BIR Ruling No. ITAD 164-05 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your application for tax treaty relief dated December 8, 2010, on behalf of your client, Phoenix Semiconductor Philippines Corp. ("Phoenix Semiconductor"), requesting confirmation that interest to be paid by Phoenix Semiconductor to the Export-Import Bank of Korea ("Korea Exim Bank") is exempt from income tax pursuant to Article 11 (4) (ii) (bb) of the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). It is represented that Korea Exim Bank is a foreign corporation organized and existing under the laws of Korea, based on its Articles of Incorporation, as amended, and on the Certificate of Business Registration issued by the Yeongdeungpo-gu, District Tax Office in Korea on May 12, 2009; that Korea Exim Bank is situated at 16-1, Yeouido-dong, Yeongdeungpo-gu, Seoul, Korea; that Korea Exim Bank is incorporated under the "The Export-Import Bank of Korea Act" and its objective is to provide financial services required for economic development such as export-import business, overseas investment, and development of overseas recoveries, among others; that Korea Exim Bank is capitalized primarily by the Government of Korea, the Bank of Korea, and the Korea Finance Corporation; that based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on May 4, 2011, Korea Exim Bank was previously licensed to establish a representative office in the Philippines on June 13, 1996, but such license was cancelled on January 20, 1999; and that, on the other hand, Phoenix Semiconductor is a corporation organized and existing under the laws of the Philippines situated at Building 2087, E. Cardinal Santos Street, Clark Freeport Zone, Pampanga, Philippines. HAICTD It is also represented that on May 27, 2010, Korea Exim Bank and Phoenix Semiconductor entered into a Loan Agreement where Korea Exim Bank extends a loan facility to Phoenix Semiconductor in an aggregate principal amount not to exceed Eleven Million U.S. Dollars (US$11,000,000.00) to finance the construction of the factory and the installation of equipment and machinery of Phoenix Semiconductor; that Phoenix Semiconductor shall from time to time request Korea Exim Bank to make a disbursement by sending a duly accomplished and signed request for disbursement; that Korea Exim Bank shall disburse the requested amount within five banking days from receipt of the notice; that Phoenix Semiconductor shall pay interest on the loan for each interest period of six months at the rate of 5.25 percent per annum; and that on June 9, 2010, Korea Exim Bank (through Deutsche Bank AG-New York) remitted an amount of Ten Million Nine Hundred Eighty Three Thousand Four Hundred Ninety One and 50/100 U.S. Dollars (US$10,983,491.50) to Phoenix Semiconductor at its account in Metrobank Clark Branch, based on Certification No. 037212010 issued by the First Vice President of Metrobank on October 12, 2010. It is further represented that on October 18, 2010, Korea Exim Bank and Phoenix Semiconductor entered into another Loan Agreement where Korea Exim Bank extends a loan facility to Phoenix Semiconductor in an aggregate principal amount not to exceed Eighteen Million U.S. Dollars (US$18,000,000) to continue to finance the construction of the factory and installation of equipment and machinery of Phoenix Semiconductor; that Phoenix Semiconductor shall from time to time request Korea Exim Bank to make a disbursement by sending a duly accomplished and signed request for disbursement; that Korea Exim Bank shall disburse the requested amount within five banking days from receipt of the notice; that Phoenix Semiconductor shall pay interest on the loan for each interest period of six months at the rate of 5 percent per annum; and that on October 26, 2010, Korea Exim Bank (through JPMorgan Chase Bank, N.A.-New York) remitted an amount of Seventeen Million Nine Hundred Seventy Two Thousand Nine Hundred Eighty Five (US$17,972,985.00) to Phoenix Semiconductor at its account in Korea Exchange Bank Manila Branch, based on Certificate of Inward Remittance No. 201011245-1 issued by an officer of Korea Exchange Bank on November 11, 2010. 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 Certification issued by the Chief Financial Officer of Phoenix Semiconductor on December 1, 2010. In reply, please be informed that Section 28 (B) (5) (a) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides that interest paid to Korea Exim Bank is subject to income tax at the rate of 20 percent, thus: cEDIAa "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; xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such interest may be exempt from income tax or 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-Korea tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the other State. CHcETA 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 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 public issues of bonds, debentures or similar obligation; and b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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 paragraph 2 hereof, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if the interest is paid in respect of: (i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (aa) in the case of the Philippines, the Central Bank of the Philippines, (bb) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea, the Korea Exchange Bank, and (cc) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Contracting States. SATDHE xxx xxx xxx" Under paragraphs 2 and 3 of Article 11, interest arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the interest is paid in respect of public issues of bonds, debentures or similar obligation, or if the interest is paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and (b) 15 percent in all other cases. Furthermore, under paragraph 4, such interest may be exempt if it is paid in respect of (i) a bond, debenture or other similar obligation of the Government of the Philippines or a political subdivision or local authority thereof; (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Bank of Korea, the Korea Exim Bank, the Korea Exchange Bank, and other qualified lending institutions in Korea. Accordingly, inasmuch as the loans were made by Korea Exim Bank, such interests to be paid by Phoenix Semiconductor to Korea Eximbank under the two Loan Agreements, payable beginning December 2010, 1 are exempt from income tax pursuant to paragraph 4 (ii) (bb), Article 11 of the Philippines-Korea tax treaty. ( BIR Ruling No. ITAD-008-11 dated January 19, 2011; BIR Ruling No. ITAD-012-09 dated April 3, 2009; BIR Ruling No. ITAD-164-05 dated December 22, 2005). Finally, Section 179 of the Tax Code of 1997, as amended, provides that the Loan Agreements, being debt instruments, are subject to documentary stamp tax at the rate of one peso (PhP1.00) for every Two Hundred Pesos (PhP200.00), or a fraction thereof of the amount subject of the Agreements, thus: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: 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 ration of its term 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. . . ." 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. aIHCSA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Pursuant to Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties).