ITAD Ruling No. 047-04

May 7, 2004 ITAD RULING NO. 047-04 Article 11, Philippines-Japan tax treaty BIR Ruling No. DA-ITAD-112-02 Philinak Industries, Inc. Lima Technology Center Malvar, Batangas Attention: Shigefumi Mizutani General Manager Gentlemen : This refers to your application for a tax treaty relief dated August 15, 2003, addressed to Regional District Office 59, Lipa City, requesting for a 15% final withholding tax on interest payments made by Philinak Industries, Inc. (Philinak) to Gomunoinaki Co., Ltd. (Gomunoinaki) pursuant to the Philippines-Japan tax treaty. It is represented that Gomunoinaki is a corporation organized and existing under the laws of Japan with principal address at 2-8-1 Kamimaezu, Naka-ku, Nagoya, Japan 4608333; 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 December 11, 2003; that Philinak is, a corporation organized and existing under the laws of the Philippines with principal address at Lima Technology center Malvar, Batangas; that on April 21, 2003, Gomunoinaki and Philinak entered into a Loan Agreement whereby the former agreed to lend the latter the total sum of $US 1,200,000; that the loan shall bear interest of the principal amount thereof calculated at 1.9%, today's LIBOR + 0.5%, per annum on a 365-day basis; and that the interest on the then outstanding principal shall be payable on April 20, 2004 which is after a one year period following Philinak's drawing date. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article "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 Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "(a) 10 per cent of the gross amount 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." 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 said income was not generated from Government securities, bonds or debentures. Therefore, the interest paid by Philinak to Gomunoinaki, who is the beneficial owner of such interest, shall be subject to tax at the preferential rate of fifteen per cent (15%) based on the gross amount of the interest pursuant to Article 11 of the Philippines-Japan tax treaty. However, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 180 of the 1997 Tax Code, as amended. ( BIR Ruling No. DA-ITAD-112-02 dated May 31, 2002 ) 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. HIaSDc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service