ITAD Ruling No. 006-03

January 16, 2003 ITAD RULING NO. 006-03 Article 11, RP-Singapore BIR Ruling No. DA-ITAD-128-00 Sagawa Express Philippines Inc . 505 Quirino Avenue, Tambo Paraaque City Attention: Sherrydan A. Laygo Assistant Accounting Manager Gentlemen : This refers to your letter dated September 12, 2002, for the application of a preferential tax rate on the interest payments of Sagawa Express Phils., Inc. (Sagawa Phils.) to Sagawa. Express Asia Pte., Ltd. (Sagawa Asia) pursuant to paragraph Article 11 of the RP-Singapore tax treaty. It is represented that Sagawa Asia is a non-resident foreign corporation with business address at 123 Pioneer Road, Singapore; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 16, 2002; that Sagawa Phils. is a domestic corporation with principal office at 505 Quirino Avenue, Tambo, Paraaque City; that on January 1, 2002, Sagawa Asia and Sagawa Phils. entered into three (3) contracts of loan whereby Sagawa Phils. requested that Sagawa Asia convert and restructure the following balance amounts of the existing Deed of Sale, Contracts of Loan Agreement and Assignment of Loan as follows: a. Deed of Sale of US Dollar One Hundred Ninety Nine Thousand Six Hundred Thirty Four and 31/100 (US$199,634.31) made and executed on 7th day of August 1998 in the City of Manila, Philippines, of which balance of US Dollar One Hundred Forty One Thousand One Hundred Fifty Two and 84/100 (US$141,152.84) remain outstanding as of the date of the agreement and, b. Contract of Loan Agreement of US Dollar Two Hundred Seventy Three Thousand Thirty Six and 56/100 (US$ 273,034.56) made and executed on 17th day of duly 1999 in the City of Paraaque, Philippines, of which balance of US Dollar Two Hundred Forty One Thousand One Hundred Forty (US$241,140.00) remain outstanding as of date of the agreement; c. Contract of Loan Agreement of US Dollar Eighty Thousand (US$80,000.00) made and executed on 22nd day of January 1999 in the City of Paraaque, Philippines; d. Contract of Loan Agreement of US Dollar Two Hundred Fifty Thousand (US$250,000.00) made and executed on 22nd of April 1999 in the City of Manila, Philippines; and e. Assignment of Loan dated 1st January 2002, Sagawa Asia has been assigned a loan amount of US Dollar Four Hundred Thirty Nine Thousand Five Hundred Thirty Eight and 4/100 (US$439,538.04) previously due from Sagawa Phils. to Sagawa Express (H.K.) Co. Limited. whereby Sagawa Asia and Sagawa Phils. in the First Contract of Loan involving the above-mentioned a) and b) have agreed to restructure the amount of loan into: 1) U.S Dollar Three Hundred Eighty Thousand Two Hundred Ninety Two and 84/100 (US$ 380,292.84) as balance of the existing Deed of Sale and Contract of Loan Agreement that commenced on 1st January 2002 to 1st June 2008; that the repayment of principal amount shall be four (4) equal bi-annual repayment starting from 31st December 2006; whereby Sagawa Asia and Sagawa Phils. in the Second Contract of Loan involving the above-mentioned c) and d) have agreed to restructure the amount of loan into: 2) U.S. Dollar Three Hundred Thirty Thousand (US$ 330,000.00) that commenced on 1st January 2002 to 1st June 2010 that the repayment of principal amount of the loan shall be four (4) equal bi-annual repayment starting from 31st December 2008; whereby Sagawa Asia and Sagawa Phils. in the Third Contract of Loan involving the above-mentioned e) have agreed to restructure the amount of loan into: 3) U.S. Dollar Four Hundred Thirty Nine Thousand Five Hundred Thirty Eight and 4/100 (US$439,538.04) that commenced on 1st January 2002 to 1st June 2006; that repayment of principal amount of the loan shall be by four (4) equal bi-annual installments starting from 31 December 2004; that the interest shall be charged or payable on the loan at the prevailing London Inter Bank Overnight Rate (LIBOR) plus one half of one percent (LIBOR + 0.50%) taken every 28th February and 31st August and that for the period from 1st January 2002 to 28th February 2002, the prevailing LIBOR as of 1st January 2002 shall be used. cCHETI In reply, please be informed that Article 11 of the RP-Singapore tax treaty provides as follows: "Article 11 "INTEREST "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. "xxx xxx xxx" Interest is generally taken to mean remuneration on money lent being remuneration coming within the category of income from movable capital. The term designates in general, income from debt claims of any kind, whether or not secured by mortgage and whether or not carrying rights to participate in profits. The terms "debt claim" of every kind obviously embraces cash deposits and security in the form of money, as well as government securities and bonds and debentures, although the three latter are especially mentioned because of their importance and of certain peculiarities that they may present. (OECD Model Tax Convention) Such being the case, the interest income to be remitted by Sagawa Phils. to Sagawa Asia relative to the aforementioned loans shall be subject to the preferential tax rate of 15% Philippine income tax based on the gross amount of the interest. However, the Loan Agreements executed by and between them shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. (BIR Ruling No. DA-ITAD 128-00 dated September 1, 2000) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service