ITAD Ruling No. 048-99

December 9, 1999 ITAD RULING NO. 048-99 RP-Japan-Art. 11 142-95 Joaquin Cunanan & Co. 14th Floor, Multinational, Bancorporation Centre, 6805 Ayala Avenue, 1226 Makati City Attention: Mr . Alexander B . Cabrera Partner, Tax Services Department Gentlemen : This refers to your letter dated March 29, 1999, requesting confirmation of your opinion that the interest payments of DAIHO PHILIPPINES INCORPORATED (DPI) on the two (2) short term loans extended by the SUMITOMO BANK LTD. (SUMITOMO) are subject to the preferential tax rate of fifteen percent (15%) pursuant to the RP-Japan Tax Treaty. cdlex It is represented that SUMITOMO is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered either as a corporation/partnership in the Philippines as per certification dated March 16, 1999 issued by the Securities and Exchange Commission (SEC); that the Sumitomo Bank Limited registered with the SEC under License No. AF095000032 is a representative office of SUMITOMO in the Philippines as per Certificate of Registration and License dated March 24, 1995 issued by the SEC; that the said representative office was established with the following functions: a) collecting and analyzing the macro information on Philippines, b) reporting to the banks domestic and overseas customers, helping said customers to invest in the Philippines and to search Philippine partner, and c) preparing for the establishment of a branch or a subsidiary in the future; that DPI is a corporation duly organized and existing under the laws of the Philippines; that on August 10, 1998, two (2) Loan Agreements were entered into by and between DPI and SUMITOMO, whereby the former made a loan to the latter in the amount of USD520,000.00 and USD250,000.00, both loans are subject to the payment of interest at the rates of 7.0875% per annum and 6.93125% per annum, respectively. In reply, please be informed that Article 11 of the RP-Japan 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 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 of the interest if the interest is paid in respect of Government securities, or bonds or debentures; cdlex (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 debtors 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. xxx xxx xxx" Such being the case, the interest income to be remitted by DAIHO PHILIPPINES INCORPORATED to SUMITOMO BANK LTD. relative to the aforementioned loans shall be subject to the preferential tax rate of 15%. (as per BIR Ruling No. 142-95, dated September 13, 1995) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group