ITAD Ruling No. 019-01

March 1, 2001 ITAD RULING NO. 019-01 RP-Canada Tax Treaty - Article 11 BIR Ruling No. 113-89 Multi-Media Telephony, Incorporated 43/F, Philamlife Tower, 8767 Paseo de Roxas Makati City Attention: Mr . Jose Perez de Venecia III Chairman/Career Executive Officer Gentlemen : This refers to your application for relief from double taxation dated December 27, 2000, pursuant to the RP-Canada Tax Treaty on the interests that Multi-Media Telephony, Incorporated will be paying to Export Development Corporation It is represented that Export Development Corporation ("EDC") with address at 151 O'Connor, Ottawa, Canada K1A 1K3, is a crown corporation that provides financial services to Canadian exporters and foreign buyers in order to facilitate and develop export trade; that it does a wide range of insurance, guarantee and loan services not normally provided by the private sector; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission (SEC) dated December 18, 2000; that MULTI-MEDIA TELEPHONY, INCORPORATED ("MTI'") is a corporation duly organized and existing in accordance with the laws of the Philippines; that MTI obtained a Twenty Million in US Dollars (US$20,000,000) loan facility from EDC; that MTI will be paying the principal and interest on the availed loan; that this will be used for the purpose of financing the procurement of Goods and Services under the Supply Contract and for other working capital and general corporate purposes for the project; that on December, 2000, MTI and EDC entered into a loan agreement whereby the former promised to pay for value received, US$20,000,000 (Twenty Million in US Dollars) to the latter payable on a total of Eleven (11) financial quarterly installments starting March 31, 2004, the first eight (8) financial quarterly installments will be repaid in the amount of $1,500,000 and the last three (3) financial quarterly installments will be paid in the amount of $2,666,667, respectively; that MTI shall pay interest on each Advances, or as the case may be, the Loan in respect of each Interest Period in arrears on the relevant Interest Payment Date at the rate per annum determined by the EDC to be aggregate of a Margin and Libor . In reply, please be informed that Article XI (1),(2),(3),(7)(b) of the RP-Canada Tax Treaty provides: "Article XI 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 the tax so charged shall, provided that the interest is taxable in the other Contracting State, not exceed 15 per cent of the gross amount of the interest. (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. However, the term "interest" does not include income dealt with in Article X. xxx xxx xxx (7) Notwithstanding the provisions of paragraph 2: xxx xxx xxx (b) interest arising in the Philippines and paid to a resident of Canada shall be taxable only in Canada if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation; (emphasis supplied) xxx xxx xxx In view of the foregoing, this Office is of the opinion and so holds that since the interest will be paid in respect of a credit extended by the Export Development Corporation, then the said interest arising in the Philippines and paid to EDC of Canada shall be taxable only in Canada. [BIR Ruling No. 113-89 dated May 29, 1989] However, the Loan Agreement entered into by and between EDC and MTI dated December, 2000 is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group