ITAD Ruling No. 025-02

March 6, 2002 ITAD RULING NO. 025-02 Article 11, RP-Netherlands BIR Ruling No. ITAD-42-99 Rizal Cement Company, Inc. 25F Petron Mega Plaza 358 Sen. Gil Puyat Avenue Makati City Attention: Mr. Roman V. Azanza Gentlemen : This refers to your application for tax treaty relief dated March 30, 2001, requesting confirmation of your opinion that interest payments made by Rizal Cement Co. Inc. (RCCI) to Cemex Netherlands B.V. (CEMEX) pursuant to a facility agreement are subject to the preferential tax rate of 10%, imposed under Article 11(2)(a)(ii) of the RP-Netherlands tax treaty. It is represented that CEMEX is a corporation organized and existing as a financial institution under the laws of the Netherlands with principal office at "Rivierstaete" Building Amsteldijk 166, 1079 L.H. Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as per certification dated March 8, 2001 issued by the Securities and Exchange Commission; that RCCI is a corporation organized and existing under the laws of the Philippines and is primarily engaged in the business of manufacturing and selling of cement with principal office address at 25th Floor, Petron Megaplaza, 358 Sen. Gil J. Puyat Avenue, Makati City; that on December 12, 2000, a Facility Agreement was entered into by and between RCCI and CEMEX; that under the Facility Agreement, CEMEX grants RCCI a loan facility in the aggregate amount of US$14,644,000.00 (United States Dollars Fourteen Million Six Hundred Forty Four Thousand) payable for a period of 2 years from December 1, 2000 unless the agreement is extended by mutual consent; that RCCI is required to pay interest at an annual rate of 90-day LIBOR plus 200 basis points computed quarterly during the term of the loan. Payment of interest, which accrual is being recorded in RCCI's books of accounts on a quarterly basis, will be made after the term of the loan. In reply, please be informed that Article 11 of the RP-Netherlands tax treaty provides as follows: "Article 11 "INTEREST "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such interest may also be taxed in the State in which it arises and according to the laws of that 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 if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of the interest in all other cases. "5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges from late payment shall not be regarded as interest for the purpose of this Article. Based on the foregoing, the interest income to be remitted by RCCI to CEMEX, a registered financial institution, relative to the aforementioned facility loan shall be subject to the preferential tax rate of 10 percent of the gross amount of the interest, pursuant to Article 11(2)(a)(ii) of the RP-Netherlands tax treaty. (BIR Ruling no. ITAD 42-99 dated November 3, 1999) Moreover, Section 180 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "Sec. 180 . Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand. On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided , That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: . . . " The same Tax Code provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippines sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefore. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the Facility Agreement must be paid and the corresponding return thereon be filed by either RCCI or CEMEX in accordance with the provisions of Revenue Regulations No. 9-2000 1 and the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group Footnotes 1. Mode of payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions.