ITAD Ruling No. 052-04

May 17, 2004 ITAD RULING NO. 052-04 Art. 11, Philippines-Korea Tax Treaty BIR Ruling No. DA-ITAD-112-02 Samsung Electro-Mechanics Philippines Corp. Blk. 5, Calamba Premiere International Park Brgy. Batino, Prinza, Calamba Laguna Attention: Mr. Dae Sik Choi General Manager Gentlemen : This refers to your application for relief from double taxation dated July 29, 2003, for a ruling on the correct tax treatment on the interest income earned on loans granted by Samsung Electro-Mechanics Co., Ltd. (Samsung Korea) to Samsung Electro-Mechanics Philippines Corporation (Samsung-Phil), pursuant to the Philippines-Korea tax treaty. It is represented that Samsung-Korea is a corporation organized and existing under the laws of Korea with principal address at 314 Maetan 3-Dong, Paldal Gu, Suwon-Si, Kyunggi-Do, Korea; 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 18, 2003; that Samsung-Phil is a corporation duly organized and existing under the laws of the Philippines with principal address at Blk. 5, CPIP, Batino Prinza, Calamba, Laguna; that on February 22, 2000, Samsung Korea and Samsung-Phil entered into a Loan Agreement whereby the former agreed to lend an aggregate amount not to exceed Thirty Five Million US Dollars (US$ 35,000,000) to finance the operating funds of Samsung-Phil; and that the said loan has an interest rate of 10.5% per annum, subject to the provision of the said Loan Agreement. In reply, please be informed that Article 11 of the Philippines-Korea tax treaty provides as follows: "Article 11 "INTEREST "1. Interest arising and paid to a resident of the other Contracting State may be taxed in the other 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 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 public issues of bonds, debentures or similar obligation; and "b) 15 per cent of the gross amount of the interest in all other cases. "3. . . . "4. . . . "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, as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises, including interest on deferred payment sales. "xxx xxx xxx" Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Korea 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 thereof and that said interest was not paid in respect of public issues of bonds, debentures or similar obligation. Accordingly, the interest paid by Samsung-Phil to Samsung-Korea, which is the beneficial owner thereof, shall be subject to fifteen (15%) per cent of the gross amount of the interest pursuant Article 11 of the Philippines-Korea tax treaty. ( BIR Ruling No. ITAD 112-02 dated May 31, 2002 ) Moreover, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 180 of the 1997 Tax Code, as amended. 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. cACEaI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service