ITAD Ruling No. 035-04

April 20, 2004 ITAD RULING NO. 035-04 Article 11, Philippines-Japan tax treaty BIR Ruling No. 181-91 Prudential Guarantee and Assurance Inc. Coyuito House 119 Palanca St., Legaspi Village Makati City Attention: Ms. Evangeline B. Mercado Assistant Vice President Gentlemen : This refers to your application for relief from double taxation dated March 17, 2003, requesting for refund of the amount of tax overwithheld and overremitted by Prudential Guarantee and Assurance Inc. (Prudential) on the interest income of The Toa Reinsurance Co., Ltd. (Toa), pursuant to Article 11 of the Philippines-Japan tax treaty. It is represented that Toa is a corporation organized and existing under the laws of Japan with principal address at 6-5 Kanda-Surugadai, 3-Chome Chiyoda-ku, Tokyo Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 29, 2003; that Prudential is a corporation organized and existing under the laws of the Philippines with principal address at 119 Carlos Palanca Jr. St., Legaspi Village, Makati City; that Toa entered into a "Fire Surplus Treaty" with Prudential, wherein the latter retains 40% of the reinsurance premiums (known as the "reserve amount") due to Toa; that the amount of reinsurance premiums withheld by Prudential in turn earns interest at the rates agreed upon by the parties in accordance with the terms of the said Fire Surplus Treaty; that the income tax rate which was applied by Prudential on such interest income is thirty-two percent (32%); and that it is the position of Prudential that only fifteen percent (15%) of the gross amount thereof should be applied to said interest income as specified in the Philippines-Japan tax treaty. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows, viz : "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 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. "xxx xxx xxx" "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 aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at a rate not to exceed 15 per cent (15%) of the gross amount of the interest provided the recipient is the beneficial owner of the interest and that the said income was not generated from Government securities, bonds or debentures. ( BIR Ruling No. 181-91 ) In view thereof, it is the opinion of this Office as it hereby holds that the tax rate to be applied to the gross amount of interest earned by Toa on the reserve amount withheld by Prudential from the reinsurance premiums collected by the latter in the Philippines is 15% ( supra ). This ruling is issued based on the foregoing facts as represented and is rendered only for the purpose of determining whether Toa is entitled to the benefits of the Philippines-Japan tax treaty. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be indorsed to the proper Office for processing and investigation. CSAaDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service