ITAD BIR Ruling No. 334-12

September 5, 2012 ITAD BIR RULING NO. 334-12 Articles 11 and 12 Philippines-Japan tax treaty Mitsui High-Tec (Philippines), Inc. 10 Binary Street, Light Industry and Science Park 1, Special Export Processing Zone Barrio Diezmo, Cabuyao Laguna Attention: Naohiro Nishijima President Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on April 20, 2009 requesting confirmation that interest and royalties paid by Mitsui High-Tec (Philippines), Inc. ("Mitsui Philippines") to Mitsui High-Tec, Inc. ("Mitsui") are subject to preferential tax treatment pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . Facts Mitsui is a foreign corporation and a resident of Japan based on the Certificate of Status of Taxable Person issued by the Yahata Tax Office in Japan on October 20, 2009. Mitsui is located at 10-1, Komine 2-chome, Yahatanishiku, Kitakyushu, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 14, 2009. On the other hand, Mitsui Philippines is a domestic corporation located at 10 Binary Street, Light Industry and Science Park 1, Special Export Processing Zone, Barrio Diezmo, Cabuyao, Laguna, Philippines. It is registered with the then Export Processing Zone Authority ("EPZA") as an export enterprise under Certificate of Registration No. 94-86 issued on October 25, 1994. Loan Agreements On October 31, 2006, Mitsui Philippines and Mitsui entered into a Loan Agreement where Mitsui granted Mitsui Philippines a loan of 500,000,000.00 to finance the construction of the latter's production equipment and for its operating capital. The loan has a maturity of five years from October 31, 2006 to October 20, 2011. The loan will be paid quarterly beginning October 20, 2007. The loan bears interest at the rate of 1.68 percent per annum and payable quarterly beginning January 20, 2007. The loan is also subject to a default interest (penalty on late payment) at the rate of 8 percent per annum. The loan will be repaid as follows: Date of Payment Amount of Principal Amount of Outstanding Repaid (in Yen) Principal Subject to Interest (in Yen) January 20, 2007 - 500,000,000.00 April 20, 2007 - 500,000,000.00 July 20, 2007 - 500,000,000.00 October 20, 2007 29,500,000.00 500,000,000.00 January 20, 2008 29,500,000.00 470,500.000.00 April 20, 2008 29,500,000.00 441,000,000.00 July 20, 2008 29,500,000.00 411,500,000.00 October 20, 2008 29,500,000.00 382,000,000.00 January 20, 2009 29,500,000.00 352,500,000.00 April 20, 2009 29,500,000.00 323,000,000.00 July 20, 2009 29,500,000.00 293,500,000.00 October 20, 2009 29,500,000.00 264,000,000.00 January 20, 2010 29,500,000.00 234,500,000.00 April 20, 2010 29,500,000.00 205,000,000.00 July 20, 2010 29,500,000.00 175,500,000.00 October 20, 2010 29,500,000.00 146,000,000.00 January 20, 2011 29,500,000.00 116,500,000.00 April 20, 2011 29,500,000.00 87,000,000.00 July 20, 2011 29,500,000.00 57,500,000.00 October 20, 2011 28,000,000.00 28,000,000.00 This loan is in connection with the early repayment by Mitsui Philippines of the two loans previously granted to it by Mitsui to Mitsui Philippines and with the sale of certain items on credit by Mitsui to Mitsui Philippines , as described hereunder: Amount of Interest Period Interest Rate Accrued Interest Total Amount Principal (in Yen) per Annum (in Yen) (in Yen) 193,936,986.00 August 1-October 2.00 percent 991,233.00 194,779,535.00 31, 2006 (92 days) 122,122,000.00 September 1- 0.97 percent 200,721.00 122,322,721.00 October 31, 2006 (61 days) Invoice No. Item Purchase Order No. Total Amount (in Yen) MH6-1496/00 36H25500 MP-S06-208 169,596,154.00 MP5-1697/00 36H25503 MP-S5-117 MP5-9185/00 30226062 MP-P5-576 MP6-0226/01 30226063 MP-S06-178 MP6-1307/00, etc. 30625838, etc. MP-S5-375, etc. Deducting these amounts (194,779,535.00, 122,322,721.00 and 169,596,154.00) from the loan of 500,000,000.00 yields a proceed of 13,301,590.00. On February 29, 2008, Mitsui Philippines and Mitsui entered into another Loan Agreement where Mitsui granted Mitsui Philippines another loan $342,000.00 to finance the purchase of the latter's production equipment. The loan has a maturity of eighteen months from March 19, 2008 to September 20, 2009. The loan will be paid quarterly beginning June 20, 2008. The loan bears interest at the rate of 3.40 percent per annum. The loan is also subject to a default interest (penalty on late payment) at the rate of 8 percent per annum. The loan will be repaid as follows: HESCcA Date of Payment Amount of Principal Amount of Outstanding Repaid (in Yen) Principal Subject to Interest (in Yen) June 20, 2008 57,000.00 342,000.00 September 20, 2008 57,000.00 285,000.00 December 20, 2008 57,000.00 228,000.00 March 20, 2009 57,000.00 171,000.00 June 20, 2009 57,000.00 114,000.00 September 20, 2009 57,000.00 57,000.00 Based on the Certificate of Inward Remittance issued by the Bank of Tokyo-Mitsubishi UFJ Manila Branch 1 on April 2, 2009, inward remittances of 13,301,590.00 and $342,000.00 were credited to the Japanese yen and US dollar accounts of Mitsui Philippines for the period October 31, 2006 to March 31, 2008, by order of Mitsui . The Royalty Agreement On January 31, 2007, Mitsui Philippines and Mitsui entered into a Royalty Agreement where Mitsui granted Mitsui Philippines the right to use certain know-how and trademarks in connection with the manufacture and sale of press tools, precision machine tools, integrated circuit lead frames, motor cores and integrated circuit assembly. The trademarks bear the marks "Mitsui High-Tech, Inc.", "Mitsui" or "MHT". In consideration, Mitsui Philippines will pay royalties to Mitsui equivalent to 7 percent of its net sales of the products. The royalties are computed every six months and payable on July 31 and January 31 of each year. The Agreement had an initial term of three years from February 1, 2007 to January 31, 2010, and remains in effect indefinitely thereafter. Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least fifteen days before the intended transaction or payment of income, thus: EITcaD "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief . . ." (Emphasis ours) This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: TaISDA " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation . In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011) . cIDHSC In view of the foregoing, since the two Loan Agreements that give rise to the interest has been in effect on October 31, 2006 and February 29, 2008 , and the Royalty Agreement that gives rise to the royalties has been in effect on January 31, 2007 , but the TTRA for this purpose was filed only on April 20, 2009 , this Office hereby DENIES relief on all interest and royalties paid by Mitsui Philippines to Mitsui before May 5, 2009, 2 pursuant to Section III (2) of RMO 1-2000. Accordingly, said interest and royalties shall be subject to income tax under Section 28 (B) (1) (for royalties) and (5) (a) (for interest) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: Provided, That effective 1, 2009, the rate of income tax shall be thirty percent (30%)" 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;" On the other hand, interest and royalties paid to Mitsui on May 5, 2009 and thereafter are subject to relief under paragraphs 1, 2, 3 and 5, Article 11, and paragraphs 1, 2, 3 and 4, Article 12, of the Philippines-Japan tax treaty, which provide: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting 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 Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, 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 Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 5. 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." TaSEHD "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties 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 Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." EAcIST The Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income , effective January 1, 2009 , amended Article 11 by simplifying the rate on interest to 10 percent thereby deleting paragraph 3 and renumbering paragraph 5 to paragraph 4, to wit: "Article 11 xxx xxx xxx 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 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." The Protocol amended Article 12 by reducing the rate on royalties in subparagraph (b) to 10 percent, to wit: "Article 12 xxx xxx xxx 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: AETcSa a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases." Under Article 11 of the amended Philippines-Japan tax treaty, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed, before January 1, 2009 , (a) 10 percent if the interest is paid in respect of government securities, bonds or debentures, or if the interest is paid by a 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. However, beginning January 1, 2009 , such interest is subject to 10 percent in all cases. The term interest 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. Under Article 12 of the treaty, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, or if the royalties are paid by a 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) before January 1, 2009 , 25 percent in all other cases, and beginning January 1, 2009 , 10 percent in all other cases. The term royalties means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience ("know-how") . ITEcAD Accordingly, with respect to interest and default interest (penalty for late payment) paid by Mitsui Philippines to Mitsui under the Loan Agreements, said interests paid on May 5, 2009 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2, Article 11 of the amended Philippines-Japan tax treaty. On the question of default interest (penalty for late payment) being considered interest under Article 11, it is considered as such since, similar to a regular interest, default interest (penalty for late payment) partakes of income arising from a debt-claim or the loan of money, and since Article 11 does not contain an additional sentence for the purpose of excluding this kind of income. The following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) explain as follows: "22. The second sentence 3 of paragraph 3 excludes from the definition of interest penalty charges for late payment but Contracting States are free to omit this sentence and treat penalty charges as interest in their bilateral conventions . Penalty charges, which may be payable under the contract, or by customs or by virtue of a judgement, consist either of payments calculated pro rata temporis or else of fixed sums; in certain cases they may combine both forms of payment. Even if they are determined pro rata temporis they constitute not so much income from capital as a special form of compensation for the loss suffered by the creditor through the debtor's delay in meeting his obligations. Moreover, considerations of legal security and practical convenience make it advisable to place all penalty charges of this kind, in whatever form they be paid, on the same footing for the purposes of their taxation treatment . . ." (Page 213) CDHaET From the viewpoint of the OECD Model Convention and some tax treaties, the reason why default interest (penalty for late payment) is excluded from the scope of Article 11 is that this does not constitute so much income for the creditor since it is not paid regularly but incidentally, and it is more of a special compensation for the loss suffered by the creditor through the borrower's default or delay in fulfilling its obligations to the creditor. However, this view is not adopted in the amended Philippines-Japan tax treaty thereby making default interest (penalty for late payment) as a taxable income but subject to relief under the treaty. Moreover, on the question of interest on the sale of goods or merchandise on credit being considered interest under Article 11 (as in the case of interest subject of the first loan where the original principal is reduced by the amount of items previously sold by Mitsui to Mitsui Philippines on credit), this interest also partakes of income arising from a debt-claim although not necessarily from the loan of money but from the loan of tangible items. The following OECD commentaries explain as follows: " Interest on sales on credit 7.8 The disadvantages described in paragraph 7.1 also arise frequently in the case of sales on credit of equipment and other commercial credit sales. The supplier in such cases very often merely passes on to the customer, without any additional charge, the price he will himself have had to pay to a bank or an export finance agency to finance the credit. In these cases, the interest is more an element of the selling price than income from invested capital. In fact, in many cases, the interest incorporated in the amounts of instalments to be paid will be difficult to separate from the actual sale price. States may therefore wish to include interest arising from such sales on credit in a paragraph providing for exemption of certain interest from taxation in the State of source, which they can do by adding the following subparagraph: cIHDaE e) if the interest is paid with respect to indebtedness arising as a consequence of the sale on credit of any equipment, merchandise or services; 7.9 The types of sales on credit referred to in this suggested provision comprise not only sales of complete units, but also sales of separate components thereof. Sales financed through a general line of credit provided by a seller to a customer constitute sales on credit as well for the purposes of the provision. Also, it is immaterial whether the interest is stipulated separately in addition to the sale price or is included from the outset in the price payable by instalments." (Pages 209-210) While the commentaries propose that interest from the sale of goods or merchandise on credit be exempt from source State taxation, this suggestion is not adopted in the amended Philippines-Japan tax treaty thereby making it a taxable income but subject to relief. On the other hand, with respect to royalties paid by Mitsui Philippines to Mitsui under the Royalty Agreement for the use of know-how and trademarks in connection with the manufacture and sale of press tools, precision machine tools, integrated circuit lead frames, motor cores and integrated circuit assembly, said royalties paid on May 5, 2009 and thereafter shall be subject to income tax at the rate of 10 percent pursuant to paragraph 2 (b), Article 12 of the amended Philippines-Japan tax treaty. Furthermore, under Section 179 of the Tax Code, the Loan Agreements between Mitsui Philippines and Mitsui are subject to documentary stamp tax equivalent to P1.00 for every P200.00 (or a fraction thereof) of the amount of the loans (500,000,000.00 for the first loan and $342,000.00 for the second 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." AcTDaH Finally, under Section 108 (A) of the Tax Code, the royalties payable to Mitsui in connection with the lease or use of the trademarks and know-how in the Philippines are generally subject to value-added tax ("VAT"), to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." 4 However, since Mitsui Philippines , originally an EPZA-registered enterprise, is entitled to the same fiscal incentives available to enterprises registered with and administered by the Philippine Economic Zone Authority ("PEZA") pursuant to Republic Act No. 7916 , 5 the Supreme Court ruled, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) , that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus . Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: EAISDH First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis . An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum . When anything is prohibited directly, it is also prohibited indirectly." Accordingly, since Mitsui , the nonresident lessor of the trademarks and know-how, is not a VAT-registered taxpayer, such royalties paid by Mitsui Philippines to Mitsui for the use of these properties shall, for VAT purposes, be treated as exempt and not subject to zero percent VAT. In either case, no output VAT is shifted or passed-on to Mitsui Philippines in the process. 6 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Located at 15th Floor, 6788 Ayala Avenue, Makati City, Philippines. 2. May 5, 2009 is the fifteenth day from TTRA filing date of April 20, 2009. 3. Paragraph 3 of the OECD Model Convention provides: "3. 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 ." 4. The VAT rate was increased to 12 percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 5. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, The Philippine Economic Zone Authority (PEZA), and for Other Purposes . Section 11 thereof provides: "CHAPTER II GOVERNING STRUCTURES SECTION 11. The Philippine Economic Zone Authority (PEZA) Board. There is hereby created a body corporate to be known as the Philippine Economic Zone Authority (PEZA) attached to the Department of Trade and Industry . . . The existing Export Processing Zone Authority (EPZA) created under Presidential Decree No. 66 shall evolve into the PEZA in accordance with the guidelines and regulations set forth in an executive order issued for this purpose." 6. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . A zero-rated sale of goods or properties (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions . (A) In general. 'VAT-exempt transactions' refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT."