ITAD Ruling No. 021-01

March 12, 2001 ITAD RULING NO. 021-01 RP-Japan Article 11 ITAD 48-99 Joaquin Cunanan & Co . Unit 306, Keppel Center Samar Loop corner Cardinal Rosales Avenue Cebu Business Park, Cebu City Attention: Victor O . Machacon Partner Assurance & Business Advisory Services Gentlemen : This refers to your letter dated July 17, 2000, on behalf of your client Sun Pleats Company, Ltd. (SPCL) for the availment of the preferential tax rate of fifteen percent (15%) on interest income pursuant to the provisions of the RP-Japan Tax Treaty. It is represented that SPCL is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 383-2 Shimo, Yutsugi Akinuno-Shi, Tokyo, Japan: that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification dated October 13, 2000 issued by the Securities and Exchange Commission; that Sun Pleats Cebu Corp. (SPCC) is a domestic company organized and existing under Philippine laws with principal address at Mactan Economic Zone, Lapu-lapu City, Cebu, Philippines; that on January 25, 2000, SPCL has granted non-interest bearing cash advances to SPCC to finance its working capital requirements for its operations; that SPCL, in line with the thrust of its affiliate SPCC to help each other, desires to convert from its advances to SPCC the amount of One Million Forty Nine Thousand Two Hundred Sixty-Five and 10/100 dollars US$ 1,049,265.10 into a loan; that the term of payment of this loan shall be for a period of five years (5) and shall bear an interest of 3.5% per annum. 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 xxx xxx xxx "(5) 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 nor 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 Based on the foregoing provisions, considering that the recipient, Sun Pleats Company, Ltd., is the beneficial owner of interest arising in the Philippines, the interest payments made by Sun Pleats Cebu Corp. are subject to the preferential tax rate of 15% Philippine income tax based on the gross amount of the interest. Moreover, the Loan Agreement executed by and between them is subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997 (as per BIR Ruling No. 48-99, dated December 09, 1999) This ruling is 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group