ITAD Ruling No. 015-00

January 25, 2000 ITAD RULING NO. 015-00 RP-Japan, Art. 11&4 142-95 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave., 1226 Makati City Attention: Atty . George J . Lavadia Principal Tax and Corporate Services Gentlemen : This refers to your application, on behalf of your client Dai-ichi Kangyo Bank Limited of Hongkong (DKB-HK) for the availment of the 15% preferential tax treaty rate regarding the interest payments received by DKB-HK from Philippine Mining Service Corporation (PMSC) pursuant to RP-Japan Tax Treaty. It is represented that DKB-HK is a branch of Dai-ichi Kangyo Bank Limited of Japan (DKB-Japan), and as such it is a non-resident foreign corporation organized and existing under the laws of Japan with office address at 31/F Glouester Tower, II Pedder St., Central Hongkong, while PMSC is a domestic corporation with business address at 11th Floor, Allied Bank Center, 6754 Ayala Avenue, Makati City; that DKB-HK has local representative in the Philippines, the Dai-ichi Kangyo Bank Limited-Manila; that on December 22, 1998, PMSC obtained a loan of US$1,200,000 from DKB-HK which is payable on June 30, 1999; that the interest will be payable on "Payment Date at 0.5% p.a. over the Banks funding cost, calculated on the basis of actual number of day elapsed in a 360-days year"; that DKB-HK is the recipient of the interest payment made by PMSC. In reply, please be informed that Article 11 of the RP-Japan Tax Treaty states that: "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 percent of the gross amount of the interest if the interest is paid in respect of Government Securities, or bonds or debentures; llcd (b) 15 per cent of the gross amount of the interest in all other cases." Corollary to the above-quoted provision is Art. 4 of the same treaty which provides that: "Article 4 (1) For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head or main office, place of incorporation or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein." Since it is clear from the language of the said treaty that resident of Japan includes any person who is liable to tax in Japan by reason of its place of head or main office or place of incorporation, DKB-HK is entitled to the benefit of the said provision being a branch of DKB-Japan whose main or head office is in Japan. Accordingly, the applicable rate on the interest payment on the loan obtained by PMSC from DKB-HK is 15% considering that DKB-HK is the recipient and also the beneficial owner of such interest and considering further that the interest income was not generated from government securities, bonds or debentures (BIR Ruling 142-95). This ruling is being issued on the basis of facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group