ITAD Ruling No. 045-03

March 17, 2003 ITAD RULING NO. 045-03 RP-Denmark, Article 11 BIR Ruling No. ITAD-191-00; BIR Ruling No. 097-87 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: J.A. Osana Tax Division Gentlemen : This refers to your letter dated February 5, 2003, requesting confirmation of your opinion that (1) the interest on refinancing loans to be extended by Pleasanton 2A ApS (Pleasanton) to Caltex Philippines, Inc. (CPI) shall be subject to the preferential tax treaty rate of 10% pursuant to the Philippines-Denmark tax treaty; and (2) the commitment fee on any unused amount of the loan is not subject to the 10% final withholding tax on interest or to any Philippine income tax. It is represented that Pleasanton is a non-resident foreign corporation organized and existing under the laws of Denmark with principal address at Sortedam Dossering 89, 3 DK-2100 Copenhagen, Denmark; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 29, 2002; that CPI is a domestic corporation with office address at 10th Floor 6750 Ayala Avenue, Makati City; that it is engaged in the manufacture, distribution, trading and marketing of petroleum products; that presently, CPI has interest bearing US dollar-denominated loans from international financial institutions, the proceeds of which were used to finance the operations, maintenance and repairs of CPI's refineries and other downstream petroleum activities; that these US dollar-denominated loans shall be refinanced with loans to be extended by Pleasanton under a credit agreement (the "Agreement") to be executed by CPI and Pleasanton; that under the Agreement, Pleasanton undertakes to extend loans to CPI, which shall not exceed an aggregate amount of US$400,000,000 outstanding at any one time; that interest at market rate shall be paid by CPI to Pleasanton on any unpaid amount of the loan principal; that CPI shall pay Pleasanton a commitment fee on the daily average unused amount of Pleasanton's commitment at the rate of 0.5% per annum; that this loan will be submitted to the Bangko Sentral ng Pilipinas (BSP) for approval by the Monetary Board prior to its execution; that upon drawdown, the loan and other required documentation will be submitted to the BSP for registration. In reply, please be informed that Article 11 of the Philippines-Denmark tax treaty provides as follows, 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 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 State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this limitation. CacEIS "3. . . . "4. 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. xxx xxx xxx" Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Denmark may be subject to Philippine tax at a rate not to exceed ten percent (10%) of the amount of the interest, if the recipient is the beneficial owner thereof. Therefore, the interest payment by CPI to Pleasanton, which is the beneficial owner thereof, shall be subject to a tax of ten percent (10%) of the gross amount of the interest. ( BIR Ruling No. ITAD-191-00 dated December 7, 2000 ) As regards the issue whether the herein commitment fee may be subject to the 10% final withholding tax on interest or to any Philippine income tax, please be informed that the term "interest" refers to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid or the borrower's use of money during the term of the loan, as well as for his detention of money after the due date for its repayment. (Sec. 2(a), Revenue Regulations No. 13-00) Thus, payment of interest presupposes the use by one person of another person's money. In the case of the commitment fee, however, it constitutes payment for Pleasanton's undertaking to make available a credit line to CPI but which the latter failed to fully use or avail of. In fact, the payment of the commitment fee assumes the non-use of the full credit line by CPI and for this reason, could not be considered as interest payment. Therefore, the commitment fee, not being interest payments, shall not be subject to the 10% final withholding tax. Further, the commitment fee may be considered as payment for services rendered by Pleasanton outside the Philippines, and thus the same shall not be subject to any Philippine income tax. ( BIR Ruling No. 097-87 dated April 6, 1987 ) Moreover, even if considered as derived from Philippine sources, the commitment fee is not taxable to Pleasanton because the latter has no permanent establishment in the Philippines as this term is defined under the RP-Denmark tax treaty, being without a branch, or an office in the Philippines. Finally, upon the execution of the Credit Agreement by and between CPI and Pleasanton, the Agreement shall be subject to documentary stamp tax pursuant to Section 180 of the Tax Code of 1997. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon reaching a binding agreement or contract between and among the parties in this case, the instrument must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consonant with the actual facts of the transaction. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service