ITAD Ruling No. 044-04

May 3, 2004 ITAD RULING NO. 044-04 Article 11 (Interest), Philippines-Singapore tax treaty Section 28 (A) (4), National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 22-04 Philippine National Oil Company PNOC Building VI, Energy Center Merritt Road, Fort Bonifacio Taguig, Metro Manila Attention: Ms. Bernadette B. Jugan Manager, Legal Department Gentlemen : This refers to your letters both dated January 16, 2004 requesting confirmation that interests paid by the Philippine National Oil Company (PNOC) to The Bank of Nova Scotia Asia Limited (Bank of Nova Scotia) and the Taiwan Cooperative Bank, Singapore Branch (Taiwan Bank [Singapore]) are subject to 15 percent income tax pursuant to Article 11 (Interest) of the Philippines-Singapore tax treaty. It is represented that the Bank of Nova Scotia is a foreign bank incorporated and existing under the laws of Singapore with principal office at No. 10 Collyer Quay, Nos. 15-01104 Ocean Building, Singapore; that Taiwan Bank (Singapore) , with registered address at No. 80 Raffles Place, Nos. 28-20 UOB Plaza 2, Singapore, is a branch in Singapore of the Taiwan Cooperative Bank (Taiwan Bank) , a foreign bank incorporated and existing under the laws of Taiwan; that based on the relevant certificates issued by the Securities and Exchange Commission on September 4, 2003, the Bank of Nova Scotia and Taiwan Bank are registered foreign corporations to engage in business in the Philippines with Classification Nos. F-789 and AF95-115, respectively; that Taiwan Bank has a branch in the Philippines, the Taiwan Cooperative Bank, Manila Offshore Banking Branch (Taiwan Bank [Manila]) , with registered address at 26th Floor, Citibank Tower, 8741 Paseo de Roxas Street, Makati City, Philippines; that, on the other hand, PNOC is a government owned and controlled corporation of the Republic of the Philippines established by virtue of Presidential Decree No. 334, with principal office at PNOC Building VI, Energy Center, Merritt Road, Fort Bonifacio Taguig, Metro Manila, Philippines; that on July 31, 2003, PNOC, the Bank of Nova Scotia and Taiwan Bank (Manila) , along with other banks acting as agent, arrangers, and creditors; entered into a U.S.$175 Million Facility Agreement, where the Bank of Nova Scotia , Taiwan Bank (Manila) , and the other creditor banks, granted PNOC a U.S.$175 million loan facility to refinance its outstanding U.S.$200 million loan facility that was previously granted to it on March 21, 2001 under a separate facility agreement; that under the subject U.S.$175 Million Facility Agreement, the Bank of Nova Scotia 's and Taiwan Bank (Manila) 's commitments to PNOC were U.S.$10,000,000 and U.S.$7,000,000, respectively; that on August 28, 2003, the Bank of Nova Scotia and Taiwan Bank (Manila) remitted U.S.$10,000,000 and U.S.$5,000,000 of their commitments to PNOC's account at Citicorp International limited in Hong Kong; that as consideration, PNOC shall pay the Bank of Nova Scotia, Taiwan Bank (Manila) , and the other creditor banks, interests at the last day of each interest period which may be either every three months, every six months, or every any other interest period as PNOC and each of the creditor banks may separately agree upon; and that the interest rate on the subject loan facility throughout each interest period shall be equivalent to the sum of the London Interbank Offer Rate (LIBOR) 1 plus a 3.50 percent margin per annum, unless, owing to certain market disruptions, an alternative interest rate is taken into account. In reply, as regards interest paid by PNOC to the Bank of Nova Scotia , please be informed that paragraphs 1 and 2, Article 11 (Interest) of the Philippines-Singapore tax treaty provide: "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 gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx" Based on the abovequoted paragraph 2, interest arising in the Philippines and paid to a resident of Singapore who is the beneficial owner of the interest may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount thereof. Accordingly, interest paid by PNOC to the Bank of Nova Scotia is subject to such income tax rate of 15 percent of the gross amount thereof by reason that the Bank of Nova Scotia is a resident of Singapore who is the beneficial owner of such interest. (BIR Ruling No. ITAD 22-04 dated March 9, 2004). As to residence, the Bank of Nova Scotia is a company whose place of incorporation and/or place of effective management is in Singapore, and as to beneficial ownership, the Bank of Nova Scotia is a creditor bank that is a party to the subject Facility Agreement. On the other hand, as regards interest paid by PNOC to Taiwan Bank (Singapore) , such interest is not subject to the same preferential income tax rate under Article 11 of the Philippines-Singapore tax treaty. In relation to the tax treaty requirements of residence and beneficial ownership, Taiwan Bank (Singapore) is both not a resident of Singapore and the beneficial owner of such interest. As to residence, Taiwan Bank (Singapore) is merely a branch or a permanent establishment of a company whose place of incorporation and/or place of effective management is in Taiwan and not in Singapore. As to beneficial ownership, Taiwan Bank (Singapore) is not a creditor bank that is a party to the subject Facility Agreement; likewise, none of the other documents presented to this Office like the relevant Certification of Inward Remittance dated August 28, 2003 by Citicorp International Limited of Hong Kong will signify Taiwan Bank (Singapore) as having any substantial participation in the negotiation and the implementation of the subject Facility Agreement for it to be considered the beneficial owner. Even assuming the beneficial owner in this case, Taiwan Bank (Singapore) nonetheless cannot avail of the requested preferential tax treatment because it is, in the first place, not a resident of Singapore. Finally, as regards interest paid by PNOC to Taiwan Bank (Manila) , please be informed that Section 28(A)(4) of the National Internal Revenue Code of 1997 provides: "(4) Offshore Banking Units. The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent of such income." As represented, Taiwan Bank (Manila) , a creditor bank that is a party to the subject Facility Agreement and the beneficial owner of the interest arising therefrom, is an offshore banking branch of Taiwan Bank . The loan it granted to PNOC, a resident of the Philippines, is in foreign currency denominations (in this case, in U.S. dollars). Accordingly, interest paid by PNOC to Taiwan Bank (Manila) is subject to final income tax at the rate of 10 percent (10%) of such income. This ruling is issued on the basis of the facts as represented. However, 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. CHDAEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service Footnotes 1. The London Interbank Offer Rate (LIBOR) is the floating interest rate offered by banks on deposits from other banks in the Eurocurrency markets. One-month LIBOR is the rate offered on one-month deposits, three-month LIBOR is the rate offered on three-month deposits, and so on. LIBOR rates are determined by trading between banks and change frequently so that the supply of funds in the interbank market equals the demand for funds in that market. Just as prime rate is often the reference of rate of interest for floating-rate loans in the domestic financial market, LIBOR is a reference rate of interest for loans in international financial markets. To understand how it is used, consider a three-year loan with a rate of interest specified as six-month LIBOR rate plus a 0.5 % margin per annum. The life of the loan is divided into six periods each six months in length. For each period the rate of interest is set at 0.5% per annum above the six-month LIBOR rate at the beginning of the period. Interest is paid at the end of the period. Source: Fundamentals of Futures and Options Market, 4th Edition, John C. Hall .