ITAD BIR Ruling No. 336-13

December 6, 2013 ITAD BIR RULING NO. 336-13 Article 11, Philippines-Japan tax treaty, as amended Transnational Diversified Corporation Penthouse Net Quad Building, 4th Avenue corner 30th Streets E-square Park West Bonifacio, Global City Attention: Ms. Socorro Z. Niro Gentlemen : This refers to the tax treaty relief application filed on October 1, 2012 requesting confirmation that the interest payments by Nyk-Fil Maritime E-training, Inc. ("NYK") to Sumitomo Mitsui Trust Bank, Ltd. ("Sumitomo") are subject to a preferential income tax rate of 10 percent 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty") . ITSacC It is represented that Sumitomo is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan with principal business address at 1-4-1 Marunouchi, Chiyoda-ku, Tokyo, Japan based on the Certificate of Residence issued by the District Director of Kojimachi Tax Office on August 23, 2012; that Sumitomo is not registered as a corporation or partnership based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 29, 2012; and that, on the other hand, NYK is a domestic corporation with address at General Luna corner Sta. Potenciana Streets, Intramuros, Manila. It is further represented that on September 28, 2012, Sumitomo and NYK, along with other co-borrowers, entered into a Facility Term Loan Agreement ("Agreement") whereby Sumitomo grants NYK a facility loan during the availability period; that the total amount of interest shall be calculated as the principal amount of each loan that it owes to Sumitomo multiplied by (i) the applicable interest rate, and (ii) the actual number of days of the interest period; that the calculation method for interest shall be on a per diem basis, inclusive of first day and exclusive of last day, assuming that there are 360 days per year, wherein divisions shall be done at the end of the calculation, and fractions less than one USD shall be rounded down; that in case of default in the payment of an obligation under the Agreement, NYK shall pay, in lieu of the prevailing interest on the loan (but without prejudice to any interest that has accrued by such due date), default interest calculated by multiplying the amount of the defaulted obligations by the rate of 2 percent per annum higher than the applicable interest rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a loan in the relevant tranche commencing on the due date of such defaulted obligations with the interest period of six months; that the calculation method for default interest shall be on a per diem basis, inclusive of first and last day, assuming that there are 360 days per year, wherein divisions shall be done at the end of the calculation, and fractions less than one USD shall be rounded down; and that, on May 10, 2013, NYK remitted to Sumitomo interest in the amount of USD2,292.30 based on the Certificate of Remittance executed by Bank of Tokyo-Mitsubishi UFJ Manila Branch on June 4, 2013. It is finally represented based on the Certificate of No Pending Case dated September 25, 2012 issued by the Corporate Secretary of NYK that the interests subject of the application for tax treaty relief is not subject of investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . . . . (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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: ECcTaS "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: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is being invoked is the Philippines-Japan tax treaty. Article 11 thereof provides as follows: "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 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: a) In the case of Japan, the Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; b) In the case of the Philippines, the Development Bank of the Philippines and the Land Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 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. 5. The provisions of paragraphs 1 and 2 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal 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 case the provisions of Article 7 or Article 14, as the case may be shall apply. HSTAcI 6. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political subdivision or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." Under paragraphs 2 and 3, Article 11 of the Philippines-Japan tax treaty, as amended, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines, but the rate of income tax that may be imposed on interest paid or received on January 1, 2009, and thereafter, the rate of 10 percent. Accordingly, the interest derived by Sumitomo from NYK under the Agreement, not having been derived by the Government of Japan, a political subdivision or a local authority of Japan, the Central Bank of Japan, a financial institution wholly owned by the government of Japan, shall be subject to income tax in the Philippines at the rate of 10 percent based on the gross amount of the interest for interest derived on January 1, 2009, and thereafter. B. n On Documentary Stamp Tax Finally, the Agreement shall be subject to the documentary stamp tax of one peso (PhP1.00) on each two hundred pesos (PhP200.00) or a fractional part thereof of the issue price of the Agreement imposed under Section 179 of the National Internal Revenue Code of 1997 (Tax Code) as amended by Republic Act No. 9243, 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 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 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. DECcAS 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 contract is located or used in the Philippines, instruments and securities issued by the governments 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 and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." 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. 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. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision. n Note from the Publisher: Copied verbatim from the official copy. Missing letter "A".