ITAD Ruling No. 025-03

January 30, 2003 ITAD RULING NO. 025-03 Article 11, RP-Singapore BIR Ruling No. DA-ITAD-128-00 R.V. Domingo & Associates Suite D. 7th Floor, The Valero Tower 122 Valero Street, Salcedo Village Makati City Attention: Mr. Jose Armand C. Arevalo Gentlemen : This refers to your letter dated November 8, 2002, requesting confirmation of your opinion that the interest payments on the loan granted by Sony Music Entertainment (Singapore Pte. Ltd. (Sony RS) to Sony Music Entertainment (Phils.), Inc. (Sony RP) are subject to the preferential tax treaty rate of 15% pursuant to Article 11 of the RP-Singapore tax treaty. It is represented that Sony RS is a non-resident foreign corporation organized and existing under the laws of Singapore with principal address at 10 Upper Aljunied Link #03-08, Singapore; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated October 10, 2002; that Sony RP is a domestic corporation with office address at GDC 1A Bldg., 750 Shaw Blvd., Mandaluyong City; that is engaged primarily in the development, production, origination, licensing, importation, marketing, rental and sale (on wholesale basis only) of records, cassette tapes, compact discs, computer software, and other audio and audio-visual carriers of entertainment and education, musical copyrights and music publishing in any media; that on September 30, 2001, Sony RP entered into a Loan Agreement with Sony RS whereby Sony RS agreed to lend Sony RP up to Three Million US Dollars (US$3,000,000.00) payable in full on September 30, 2004; that interest on each draw-down will be calculated on the actual daily balance using the current 30-day US Dollar inter-bank offer rate (LIBOR) plus a spread of 12.5 basis points. In reply, please be informed that Article 11 of the RP-Singapore tax treaty provides as follows: "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 percent 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" Interest is generally taken to mean remuneration on money lent being remuneration coming within the category of income from movable capital. The term designates in general, income from debt claims of any kind, whether or not secured by mortgage and whether or not carrying rights to participate in profits. The term "debt claims" of every kind obviously embraces cash deposits and security in the form of money, as well as government securities and bonds and debentures, although the three latter are especially mentioned because of their importance and of certain peculiarities that they may present. (OECD Model Tax Convention). Such being the case, the interest income to be remitted by Sony RS to Sony RP relative to the aforementioned loan shall be subject to the preferential tax rate of 15 percent (15%) Philippine income tax based on the gross amount of the interest. However, the Loan Agreement executed by and between Sony RS and Sony RP shall be subjected to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. ( BIR Ruling No. DA-ITAD 128-00 dated September 1, 2000 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. ScCDET Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service