ITAD Ruling No. 026-04

March 19, 2004 ITAD RULING NO. 026-04 Article 11, RP-Switzerland BIR Ruling No. DA-ITAD 126-03 Joaquin Cunanan & Co. 29th Floor Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City Attention: Alexander B. Cabrera Tax Partner Gentlemen : This refers to your letter dated November 15, 2003, on behalf of your client, Philip Morris Philippines Manufacturing, Inc. (PMPMI), requesting confirmation that the interest payments made by your client to Altria Finance Europe AG (Altria) are subject to a ten percent (10%) final withholding tax pursuant to the Philippines-Switzerland tax treaty. It is represented that Altria is a non-resident foreign corporation duly organized and existing under the laws of Switzerland with principal office located at CH-6301 Zug, Switzerland; 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 April 8, 2003; that PMPMI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 27th Floor, The Enterprise Center, 6766 Ayala Ave. cor. Paseo de Roxas, Makati City; that it is primarily engaged in the cigarette industry and in connection thereto, perform such other activities, including but not limited to the manufacture, processing, packing, buying, selling on wholesale, distributing and everything else dealing with cigarettes; that Altria granted PMPMI an interest bearing US dollar denominated loan in the amount of US$ 8,000,000.00 with an interest rate of 1.55% per annum; that in its letter dated March 13, 2003, Altria confirmed with PMPMI the details of the Short Term Deposit under Contract Reference AA026392 in the total amount of US$8,000,000.00 (Eight Million United States Dollars) which will mature on March 15, 2004; that the proceeds of the loan shall be used for PMPMI's business operations. In reply, please be informed that Article 11 of the Philippines-Switzerland tax treaty provides, viz : "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 also be taxed in the Contracting 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 10 per cent of the gross amount of interest . (Emphasis supplied) "(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 laws of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. Based on the above-quoted provisions, interest arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of the interest if the recipient is the beneficial owner thereof. Such being the case, this Office is of the opinion and so holds that the interest payments by PMPMI to Altria, the beneficial owner of the interest, pursuant to their Loan Agreement are subject to a preferential rate of ten percent (10%) pursuant to Article 11 of the Philippines-Switzerland tax treaty which provisions apply on income derived or which accrued beginning January 1, 2002. ( BIR Ruling No. DA-ITAD 126-03 ) cDECIA This ruling is issued on the basis of the facts as represented. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service