ITAD Ruling No. 016-00

January 25, 2000 ITAD RULING NO. 016-00 RP-Singapore Article 7 [UN-014-1-9-95] Luzon Electronics Technology, Inc. Special Export Processing Zone, Gateway Business Park, Javalera, Gen. Trias, Cavite City Attention: Mr . Takaaki Fukushima Comptroller Gentlemen : This refers to your letter dated June 10, 1999, on behalf of HITACHI METALS, LTD., (HITACHI) requesting for a preferential tax treaty rate of fifteen percent (15%) to be withheld on interests payments to LUZON ELECTRONICS TECHNOLOGY, INC., (LET) pursuant to the RP-Japan Tax Treaty. llcd It is represented that HITACHI is a non-resident foreign corporation duly organized and existing under the laws of Japan, with principal office at 1-2, 2-Chrome, Marunouchi, Chiyoda-Ku, Tokyo 100, Japan; that it has no permanent establishment in the Philippines as evidenced by the Certificate of Non-Registration from Securities and Exchange Commission (SEC) dated August 25, 1999; that LET is a domestic corporation duly organized and existing under the laws of the Philippines and duly registered with the Philippine Economic Zone Authority with Certificate of Registration No. 95-121 dated November 14, 1995; that on June 15, 1998, the first Loan Agreement was entered into by and between HITACHI and LET, whereby the former will provide the latter the amount of One Billion Six Hundred Fifty Million Japanese Yen 1,650,000,000.00; that LET shall pay interest on the first Loan outstanding from time to time on each Interest Payment Date for the Interest Period then ending based on the Quarterly Interest Rate as set on the Interest Rate Setting Date; that on July 30, 1999 and April 12, 1999, the second and third Loan Agreement was entered into by and between HITACHI and LET, in the amount of One Billion Two Hundred Million Japanese Yen 1,200,000,000.00 and Seven Hundred Eighty Million Japanese Yen 780,000,000.00 respectively; that LET shall pay interest on the second and third Loans less any withholding tax without need of demand within ten (10) days after the end of each interest period at the applicable rate. prcd In reply, please be informed that Article 11 of the RP-Japan Tax Treaty 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: 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 incentive 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. "4. . . . "5. The term "interest" as used on 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. xxx xxx xxx" Such being the case, the interest income to be remitted by LET to HITACHI relative to the aforementioned loan shall be subject to the preferential tax rate of 15%. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group