ITAD Ruling No. 054-05

June 15, 2005 ITAD RULING NO. 054-05 RP-Switzerland tax treaty, Article 11; NIRC, Sec. 180; BIR Ruling No. DA-ITAD-26-04 ESEC (Philippines),Inc . G/F Plaz@ Building Northgate Avenue Northgate Cyberzone, Filinvest Corporate City Alabang, Muntinlupa City 1780 Attention: Belinda A. Co Finance & Admin Manager Gentlemen : This refers to your letter dated June 25, 2004 requesting for a ruling on the following to wit : 1. Is the interest payable to your parent company, Unaxis Holding AG (UNAXIS) under a Loan Facility Agreement subject to Philippine withholding tax? 2. Is there a tax treaty between the Philippines and Switzerland? If yes, what is the applicable tax rate on interest income payable to Unaxis? It is represented that UNAXIS is a nonresident foreign corporation duly organized and existing under the laws of Switzerland with principal office address at Churerstrasse 120, CH-8808 Pfaffikon, Switzerland; 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 29, 2004; that ESEC (Philippines) Inc. (ESEC) is a corporation duly organized and existing under the laws of the Republic of the Philippines; that on June 1, 2004, UNAXIS and ESEC entered into a Loan Facility Agreement (Loan Agreement) whereby the former granted to the latter a loan facility in the amount of Two Million United States Dollars (US$2,000,000.00);and that under the Loan Agreement, the rate of interest payable shall be the aggregate of (i) the LIBOR rate of a duration comparable to the relevant interest period; and (ii) the applicable margin of 135 basis points per annum. In reply, please be informed that Article 11 of the Philippines-Switzerland tax treaty provides as follows: "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 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 10 per cent of the gross amount of the interest .(underscoring supplied) "3. 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xxx xxx xxx" Based on the above-quoted provisions, interest arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of the interest if the recipient is the beneficial owner thereof. Such being the case, this Office is of the opinion and so holds that the interest payments by ESEC to UNAXIS, the beneficial owner of the interest pursuant to their Loan Facility Agreement, are subject to the preferential tax rate of 10% pursuant to Article 11 of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD DA-26-04 dated March 19, 2004) Moreover, the Loan Facility Agreement entered into by and between ESEC and UNAXIS is subject to the documentary stamp tax of One Peso (P1.00) on each Two Hundred Pesos (P200), or fractional part thereof, of the issue price of any such debt instrument, imposed under Section 179 of the National Internal Revenue Code of 1997, as amended. cHTCaI 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service