ITAD Ruling No. 031-01

March 13, 2001 ITAD RULING NO. 031-01 RP-Japan Tax Treaty Art. 11 & Art. 23 16-00 P & I Resorts San Isidro, San Fernando Cebu City Attention: Koji Inoue President Gentlemen : This refers to your letter dated March 11, 1999 and May 25, 1999 requesting confirmation of your opinion listed hereunder regarding the interest payments on your loan from Kabushikigaisha P&I Enterprise Ltd. (P&I Enterprise), to wit: 1. that interest paid to P&I Enterprise is subject to a preferential rate pursuant to the RP-Japan Tax Treaty; 2. that, although there was over withholding and over remittance of the difference between the appropriate withholding tax rate of 10% and the erroneous rate of 15%, the actual amount withheld and remitted using the 15% rate may be used as tax credit for P & I Enterprise when the related interest income will be reported as part of its taxable revenue in Japan; and 3. that BIR Form 1743-750 (now BIR Form 2307) and Revenue Official Receipts evidencing remittance of tax withheld on interest payment of loan together with our opinion or ruling to be issued are sufficient documents which the tax authority in Japan will recognize for tax credit purposes of P&I Enterprise. It is represented that P&I Enterprise is a corporation duly organized and existing under the laws of Japan with business address at Parshas 21 105-B, 2-10-19 Goichuohigashi, Ichihara City Chiba, 290 Japan; that it is not licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 16, 1999; that P&I Resorts Inc. (P&I Resorts) is a domestic corporation with address at San Isidro, San Fernando, Cebu; that P&I Resorts is registered at the Board of Investments (BOI) on a "preferred pioneer" status as certified by the Acting Board Secretary dated May 24, 1995; that on June 22, 1998, P&I Resorts entered into a Loan Agreement with P&I Enterprise amounting to Y546,827,192.96 for capital expenditure purposes of the former; that P&I Resorts withheld and remitted 15% withholding tax on the interest income derived by P&I Enterprise to the said loan; and that upon verification, P&I Resorts came to know that interest payment of a loan by a "preferred pioneer" enterprise to a Japan entity is subject only to 10% withholding tax. In reply thereto, please be informed as follows; Article 11 of the RP-J apan Ta x Treaty provides as follows: "Article 11 "1. . . . ; "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 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest." "4. . . . ; "5. 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. xxx xxx xxx Based on the foregoing, since P&I Resorts, Inc. is registered with the BOI on a preferred pioneer status, the amount of tax to be imposed on the interest payment of P&I Resorts, Inc. to P&I Enterprise being a resident of Japan, shall not exceed 10 per cent of the gross amount of the interest pursuant to paragraph 3 Article 11 of the RP-Japan Tax Treaty. As regards the second issue on tax credit, please be informed that Article 23 of the said RP-Japan Tax Treaty provides as follows: "1. Subject to the laws of Japan regarding the allowance as a credit against Japanese tax of tax payable in any country other than Japan, Philippine tax payable in respect of income derived from the Philippines shall be allowed as a credit against Japanese tax payable in respect of that income. xxx xxx xxx "3. For the purposes of the credit referred to in the first sentence of paragraph (1), Philippine tax shall always be considered as having been paid at the rate of 20 per cent in the case of dividends to which the provision as of paragraph (3) of Article 10 apply, and at the rate of 15 per cent in the case of interest to which the provisions of paragraph (2) (a) or (3) of Article 11 apply, and in the case of royalties to which the provisions of paragraph (3) of Article 12 apply." Accordingly, the actual amount withheld and remitted by P&I Resorts using the 15% rate may be used as tax credit for P&I Enterprise when the related interest income will be reported as part of its taxable revenue in Japan. Finally, BIR Form 1743-750 (now BIR Form 2306) and Revenue Official Receipts are proofs that taxes were withheld and subsequently remitted to the BIR on your interest payments of the loan. They are sufficient documents that the tax authority in Japan may recognize for tax credit purposes of P&I Enterprise, without prejudice to the additional documents which may be required in their jurisdiction. However, the Loan Agreement executed by and between P&I Resorts and P&I Enterprise shall be subjected to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. TAcDHS This ruling is 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group