ITAD Ruling No. 022-04

March 9, 2004 ITAD RULING NO. 022-04 Article 11, RP-Singapore tax treaty Sec 180, NIRC of 1997 RR No. 12-01 BIR Ruling No. DA-ITAD-93-01 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Romulo S. Danao, Jr. Tax Division Gentlemen : This refers to your application for relief from double taxation dated December 29, 2003, on behalf of your client, Reach Network Philippines (Reach Philippines), requesting confirmation of your opinion that the interest payments on the convertible note (c-note) issued by Reach Philippines to Reach Holdings Singapore Pte., Ltd. (Reach Singapore) are subject to the preferential tax rate of 15%, pursuant to the Philippines-Singapore tax treaty. It is represented that Reach Singapore is a non-resident foreign corporation organized and existing under the laws of Singapore with principal address at 20 Raffles PL # 09-01, Singapore 048620; that it is a resident of Singapore for purposes of the Philippines-Singapore tax treaty for taxable years 2004 and 2005 per certificates of residence issue by the Inland Revenue Authority of Singapore; that it has no permanent establishment in the Philippines; that it is not registered either as a corporation or as a partnership per certification issued by the Securities and Exchange Commission dated December 10, 2003; that Reach Philippines is a corporation organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority with office address at 34th Floor, RCBC Tower, 6819 Ayala Avenue, Makati City; that on February 21, 2003, Reach Philippines issued to Reach Singapore a registered convertible note (c-note) with US$2,040,000 which carries a coupon at a rate of 5.8% per annum of the face value of the note from the date of issuance to the date of maturity; that Reach Singapore shall have the right, at maturity or at any earlier time and at its sole option, by written notice to Reach Philippines to convert the outstanding principal amount of the loan together with any accrued interest thereon (including default interest, if any) and any other "unpaid obligation" referred to in the c-note, into such number of unissued shares of common capital stock of Reach Philippines, the total par value of which is equal to the total amount of the "unpaid obligation"; that under the terms of the issuance, Reach Philippines is required to pay interest annually; that in this respect, while the accrual of the interest is being made annually in the books of Reach Philippines, it is payable upon maturity, that unless Reach Singapore exercises its conversion right, the maturity date of the c-note is on February 21, 2006. In reply, please be informed that Article 11 of the Philippines-Singapore tax provides as follows, to wit: "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 the 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" Based on-the aforesaid provisions, interest income which arises in the Philippines and paid to a resident of Singapore is taxable in the Philippines at the preferential tax rate not exceeding 15% of the gross amount of the interest if the recipient of such interest is also the beneficial owner thereof. In view thereof, this Office confirms your opinion and so holds that the interest payments by Reach Philippines to Reach Singapore, the beneficial owner of the interest on the said convertible note, are subject to the preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 11 of the Philippines-Singapore tax treaty. ( BIR Ruling No. DA-ITAD-93-01 dated October 19, 2001 ) However, Section 2.57.4 of Revenue Regulations No. (RR) 2-98, as amended by RR 12-01, provides, viz ; "Sec. 2.57.4 Time of Withholding The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books , whichever comes, first. The term `payable' refers to the date the obligation becomes due, demandable or legally enforceable. Such being the case, Reach Philippines shall be required to withhold the said tax upon the annual accrual of the interests, although such interests are payable only upon maturity, i.e., on February 21, 2006, and shall remit the tax withheld within ten (10) days after the month of accrual of said interests. (Section 2.58, RR 2-98) In addition, the convertible notes executed by and between Reach Philippines and Reach Singapore covering the above loans shall be subject to documentary stamp tax under Section 180 of the National Internal Revenue Code of 1997 (NIRC) This ruling is issued on the basis of the facts as represented. It shall be without force and effect insofar as the herein parties are concerned, if upon investigation it shall be disclosed that the facts are different or where Reach Singapore exercises its conversion rights under the c-note. In the latter case, another ruling may be applied for if confirmation of opinion on the proper tax treatment should be sought. aEIADT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service