ITAD Ruling No. 023-00

January 28, 2000 ITAD RULING NO. 023-00 RP-Japan Art. 11 (2) 142-95029-99 Itabashi Seiki Philippines, Inc. Lot 1, 1A, 3 & 5, Blk. 16, Phase IV Cavite Export Processing Zone Rosario, Cavite Attention: Ms . Cilda B . Puyod Fin . & Adm. Manager Gentlemen : This refers to your letter dated February 12, 1999 requesting for a ruling on the correct withholding tax rate for the interest payments to be made by Itabashi Seiki Philippines, Inc. (ISPI), a domestic corporation, to Itabashi Seiki Company, Ltd. (ISC) pursuant to the RP-Japan tax treaty. It appears that ISC is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered either as a corporation or a partnership in the Philippines per Certificate of Non-Registration from the Securities and Exchange Commission dated June 8, 1999; that a Loan Agreement was executed by ISC, as creditor, and ISPI, as debtor, on August 3, 1998 in the amount of Two Million Four Hundred Thousand U.S. Dollars (US$2,400,000.00); that the loan bears interest at a rate of three and 25/100 (3.25%) percent per annum on the outstanding principal ; and that the loan is payable in eight (8) years. 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 percent of the gross amount of the interest if the interest is paid in respect of government securities, or bonds or debentures; (b) 15 percent of the gross amount of the interest in all other cases cdll "3. . . . "4. . . . Based on the foregoing, the applicable withholding tax rate shall be 15% of the gross amount of the interest payment since the payee (ISC) is the beneficial owner of the interest income received from ISPI and the interest income was not generated from government securities, bonds or debentures. (BIR Ruling No. 142-95 dated September 13, 1995) 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. cdlex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group