ITAD Ruling No. 043-00

2000 ITAD RULING NO. 043-00 Article 11, RP-Germany Tax Treaty Article 11, RP-France Tax Treaty 024-80 216-89 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: Atty . Jayson L . Fernandez Atty . Priscilla B . Valer Gentlemen : This is in connection with your application for relief from double taxation dated June 14, 1999, on behalf of your client, Apo Cement Corporation (hereinafter referred to as "APO"), requesting confirmation of your opinion that the interest to be paid by APO to Bayerische Hypo-und Vereinsbank (hereinafter referred to as "BHV") is not subject to income tax, pursuant to the RP-Germany and RP-France Tax Treaties. It is represented that APO is a corporation organized and existing under the laws of the Philippines; that it is engaged in the business of, among others, manufacturing and selling of cement, limestone and its allied products; that as part of its expansion program, APO entered into various contracts with several German and French companies for the supply of machinery and equipment necessary for the manufacture of cement products, including supervision and engineering services in connection therewith; that to finance its obligation under the said contracts, APO entered into five (5) loan agreements with BHV, Munich and one (1) with BHV, France; that BHV, Munich has its principal place of business at Kardinal-Faulhaber-Sisal Strabe 1, D-80333 Munich, Germany, and that BHV, France, at 34, Rue Pasquier, Paris, France; that neither BHV, Munich nor BHV, France have any permanent establishment in the Philippines, as per certification issued by the Securities and Exchange Commission dated July 9, 1999; that the said loan agreements with BHV, Munich are insured with the ECA Hermes Kreditversicherungs AG (hereinafter referred to as "Hermes Kredit") of Germany; that the said loan agreement with BHV, France is registered with the Compagnie Francaise d'Assurance pour le Commerce Extriur SA (hereinafter referred to as "COFACE"); that all of the six (6) loan agreements are guaranteed by JG Summit Holdings, Inc.; and that pursuant to the said agreements, interests will accrue to BHV, Munich and BHV, France. In reply, please be informed as follows: I. On the loan agreements with BHV, Munich insured with Hermes Kredit Article 11 of the RP-Germany 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 be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: (a) 10 per cent 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 (iii) in respect of public issues of bonds, debentures or similar obligations, (b) 15 per cent of the gross amount of such interest in all other cases. xxx xxx xxx "4. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of the other Contracting State as by 'Hermes Deckung' in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting State. LibLex xxx xxx xxx" In view of this provision, interest arising from the Philippines shall be exempt from tax in the Philippines if it is derived in respect of a loan insured by, among others, Hermes Deckung. As recognized by this Office in BIR Ruling No. 216-89, Hermes Kredit (as stated in the said loan agreements) is the same as "Hermes Deckung." This fact was later on confirmed by the Embassy of the Federal Republic of Germany in the Philippines by stating in its letter dated December 14, 1999 that the said loan agreements are insured by the Federal Republic of Germany as represented by Hermes Kredit. Such being the case, the interest payments to be remitted by APO to BHV, Munich, pursuant to the same loan agreements, shall not be subject to Philippine income tax and, consequently, to withholding tax imposed under the Tax Code of 1997. llcd II. On the loan agreement with BHV, France insured with COFACE Article 11 of the RP-France 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 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 per cent of the amount of the interest. "3. Notwithstanding the provisions of paragraph 2, (a) Interest arising in a Contracting State and paid to a resident of the other Contracting State in respect of a bond, debenture or other similar obligation of the government of the first-mentioned Contracting State or a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other Contracting State; (b) Interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by: (i) in the case of France, the Banque francaise du commerce extriour BFCE or the Compagnie francaise d' assurance pour le commerce extriur COFACE; and (ii) in the case of the Philippines, the Central Bank of the Philippines or such lending institution as is specified and agreed in letters exchanged between the competent authorities of the Contracting States; prcd xxx xxx xxx" In view of the foregoing provisions and considering that the loan agreement is insured with COFACE, the interest payments to be remitted by APO in favor of BHV, France shall be taxable only in France and thus, not subject to Philippine income tax and, consequently, to withholding tax imposed under the Tax Code of 1997. (BIR Ruling No. 024-80) In view of all the foregoing, interest payments to be remitted by APO pursuant to the loan agreements with BHV, Munich insured with Hermes Kredit, and with BHV, France insured with COFACE, shall not be subject to Philippine income tax. Consequently, no income tax shall be withheld therefrom. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group