ITAD Ruling No. 043-02

April 5, 2002 ITAD RULING NO. 043-02 RP-Malaysia Tax Treaty, Article 11 Tax Code of 1997, Section 28(B)(5)(a) BIR Ruling No. ITAD 138-00 Philippine National Oil Company PNOC Building VI, Energy Center Merritt Road, Fort Bonifacio Taguig, Metro Manila Attention: Bernadette B. Jugan Manager, Legal Department This refers to your letter dated September 11, 2001 requesting confirmation of your opinion that the interest paid on loan secured by Philippine National Oil Company from Malayan Banking Berhad Hongkong is subject to 15% final tax pursuant to RP-Malaysia Tax Treaty. It is represented that Malayan Banking Berhad is a non-resident foreign corporation duly organized and existing under the laws of Malaysia; that it has an existing branch in Hongkong, Malayan Banking Berhad Hongkong Branch (Malayan-Hongkong), with office address at 18th and 19th floors, Entertainment Building, 30 Queen's Road, Central Hongkong; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 22, 2001; that Philippine National Oil Company (PNOC) is a government owned and controlled corporation established by virtue of Presidential Decree No. 334 (as amended) with business address at PNOC Building VI, Energy Center, Merritt Road, Fort Bonifacio, Taguig, Metro Manila; that on March 26, 2001, a US$200,000,000.00 loan facility was made available to PNOC as borrower by a group of banks on whose behalf Citibank, N.A. Manila Branch and Citicorp International Ltd. acted as arranger/agent; that one of the lending banks is Malayan-Hongkong with a participating amount of US$5,000,000.00 with an interest rate on such loan as stated on the Facility Agreement. In reply, please be informed that Article 11(2) of the RP-Malaysia tax treaty provides as follows: "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 State. "2. However, such interest may 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 15 per cent of the gross amount of the interest. "3. Notwithstanding the provisions of paragraph 2, interest paid to a resident of the Philippines on an approved loan or a long-term loan shall be exempt from Malaysian tax. "4. Notwithstanding the provisions of paragraphs 2 and 3, the Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived by the Government from that other State. "xxx xxx xxx "6. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent according to the taxation laws of the Contracting State in which the income arises. "xxx xxx xxx Considering that the recipient, Malayan Hongkong, is a resident of Malaysia within the meaning of the RP-Malaysia tax treaty and is the beneficial owner of the interest arising in the Philippines, the interest payments made by PNOC are subject to Philippine tax at the rate of 15% of the gross amount of interest. (BIR Ruling No. ITAD-138-00) Furthermore, the loan agreement executed by and between them shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon, investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service