ITAD Ruling No. 055-02

April 22, 2002 ITAD RULING NO. 055-02 Article 11 & 22, RP-Singapore NIRC Sec. 34 (c) Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. J. A. Osana Tax Division Gentlemen : This refers to your application for relief from double taxation dated June 18, 2001, on behalf of your clients, Pilipinas Shell Petroleum Corporation (PSPC) and Shell Treasury Centre East, Pte (STCE), requesting confirmation of your opinion that the tax sparing provision of the RP-Singapore tax treaty applies to PSPC and similarly situated affiliates in the Philippines with respect to the interest income that they will derive from their deposit and lending transactions with STCE. It is represented that STCE is a corporation organized and existing under the laws of Singapore with principal office at #4 Shell House, UE Square, 83 Clemenceau Avenue, Singapore; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated June 8, 2001 issued by the Securities and Exchange Commission; that it was incorporated on February 1, 2000 and was granted a license by the Monetary Authority of Singapore (MAS) to operate as a financial institution under the Income Tax Regulations for Finance Treasury Centre (FTC); that as an FTC, STCE operates as an in-house bank for the Shell operating companies in the Asia Pacific; that from its offices in Singapore, STCE provides a full range of wholesale banking services to all Shell affiliates in the Asia Pacific Region, including borrowing, deposit taking, provision of credit facilities and foreign exchange and interest rate hedging services, among others; that STCE is offering its banking services to PSPC and other affiliates in the Philippines; that PSPC is a corporation organized and existing under the laws of the Philippines and is an affiliate of STCE, with principal office address at 4 Shell House, 156 Valero Street, Salcedo Village, Makati City; that PSPC intends to open a deposit account with/or lend money to STCE; that other Shell affiliates in the Philippines may likewise enter into similar transactions with STCE in the future; and that like any other bank, STCE shall pay interest to PSPC and other Shell affiliates with respect to the deposits and/or loans to STCE. Based on the above, you seek confirmation that PSPC and other similarly situated Shell affiliates in the Philippines can avail of the tax sparing provision under the RP-Singapore tax treaty. In reply, please be informed that Article 11 of the RP-Singapore tax treaty provides: "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 be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx." Pursuant to the foregoing provision, the interest income received by a Philippine resident from a Singapore resident shall be subject to 15% tax in Singapore. However, it must be noted that under Singapore's concessionary tax regime for STCE, interest payments made by STCE to approved affiliates that are not resident of Singapore, such as PSPC, shall be exempt from tax in Singapore by virtue of Section 13(4) of the Singapore Income Tax Act. 1 Pursuant to said Section, Mr. Ngiam Tong Dow, Permanent Secretary of the Ministry of Finance of Singapore, issued Notification No. S 421, paragraph 2 of which states as follows: "2. There shall be exempt from tax the interest in connection with any loan paid by a company which is approved as a Finance and Treasury Centre under Section 43G of the Act a) In currencies other than Singapore dollars; and b) to any of its offices or associated companies outside Singapore which has been approved for the purposes of this Notification by the Minister or such other person as he may appoint". As a matter of fact, the last paragraph of Section 2 of the letter dated February 16, 2000 issued by the MAS conferring approved FTC status to STCE provides as follows: To facilitate the conduct of FTC activities, and pursuant to Section 13(4) of the Income Tax Act, we have also approved the waiver of withholding tax on interest payable on foreign currency denominated loans obtained by STCE from the following sources for the conduct of qualifying FTC activities: a) Overseas banks; and b) Approved network companies (but excluding funds borrowed from sources other than banks). Further, per MAS letter dated April 12, 2001, the Shell affiliates listed as "approved network companies" are: a) Pecten Orient Company LLC; b) Shell Exploration (China) Limited; c) Shell Pacific Enterprises Limited; d) Pilipinas Shell Petroleum Corporation; e) Shell Philippines Exploration B.V.; and f) Shell Philippines LLC of which Pilipinas Shell Petroleum Corporation, Shell Philippines Exploration B.V. and Shell Philippines LLC are Philippine affiliates. HCISED So that any interest that the PSPC or any of the "approved network companies" in the Philippines will derive from their transactions with STCE will be exempt from the 15% tax in Singapore. On the other hand, insofar as Philippine taxes are concerned, as a domestic corporation, PSPC is subject to the corporate income tax on its net taxable income from sources within and outside of the Philippines pursuant to Section 27(A) or (E) of the Tax Code of 1997. Thus, the interest income that PSPC will receive from STCE will form part of its gross income from worldwide sources for purposes of computing its net taxable income subject to the 32% regular corporate income tax or 2% minimum corporate income tax. In this connection, Section 34(C) of the Tax Code allows a domestic corporation to credit against its regular corporate income tax liability the amount of income taxes paid or incurred during the taxable year to any foreign country with respect to income derived from sources outside of the Philippines. Specifically, Section 34(C) provides: (3) Credit Against Tax for Taxes of Foreign Countries . If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation . In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and xxx xxx xxx (4) Limitations on Credit . The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. Thus, as a general rule, a domestic corporation like PSPC may claim tax credit for the amount of income taxes paid or incurred during the taxable year to a foreign country like Singapore. In this light, Article 22 of the RP-Singapore tax treaty provides as follows: "Article 22 "ELIMINATION OF DOUBLE TAXATION "1. Subject to the laws of Singapore regarding the allowance as a credit against Singapore tax of tax payable in any country other than Singapore, Philippine tax payable in respect of income derived from the Philippines shall be allowed as a credit against Singapore tax payable in respect of that income. Where such income is a dividend paid by a company which is a resident of the Philippines to a company which is a resident of Singapore and which owns not less than 15 per cent of voting shares of the company paying the dividend, the credit shall take into account the Philippine tax payable by that company in respect of its income. The credit shall not, however, exceed that part of the Singapore tax, as computed before the credit is given, which is appropriate to such item of income. "2. The term "Philippine tax payable" shall be deemed to include the amount of Philippine tax which would have been paid if the Philippine tax had not been exempted or reduced in accordance with this Convention and the special incentive laws designed to promote economic development in the Philippines, effective on the date of signature of this Convention, or which may be introduced in the future in the Philippine taxation laws in modification of, or in addition to, the existing laws. "3. Subject to the laws of the Philippines regarding the allowance as a credit against Philippine tax of tax payable in any country other than the Philippines, Singapore tax payable in respect of income derived from Singapore shall be allowed as a credit against the Philippine tax payable in respect of that income. Where such income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of the Philippines and which owns not less than 15 per cent of the voting shares of the company paying the dividend, the credit shall take into account the Singapore tax payable by that company in respect of its income. The credit shall not, however, exceed that part of the Philippine tax, as computed before the credit is given, which is appropriate to such item of income. "4. The term "Singapore tax payable" shall be deemed to include the amount of Singapore tax which would have been paid if the Singapore tax had not been reduced in accordance with this Convention and the special incentive laws designed to promote economic development in Singapore, effective on the date of signature of this Convention, or which may be introduced in the future in the Singapore taxation laws in modification of, or in addition to, the existing laws. Under the aforequoted provisions, a Philippine resident is entitled to a tax credit for Singapore tax payable in respect of income derived from Singapore. However, if tax due in Singapore is reduced in accordance with special incentives laws designed to promote economic development, such foregone tax is still considered a "Singapore tax payable" as defined in paragraph 4 of Article 22, which would then be allowed as tax credit against Philippine tax payable in respect of such income, subject to the provision of paragraph 3 of Article 22. In view of all the above, this Office is of the opinion and so holds that the tax sparing provision of the RP-Singapore tax treaty should apply to PSPC and other similarly-situated Shell affiliates in the Philippines considering that the interest income that they will receive from STCE shall be exempt from the 15% tax in Singapore by virtue of the MAS letters to STCE dated February 16, 2000 and April 12, 2001. We likewise confirm your opinion that for purposes of computing their net taxable income, they should be allowed to claim tax credit in the Philippines equivalent to the amount of tax that STCE would otherwise be required to withhold from their interest income had the Government of Singapore not granted tax exemption with respect to the said income (i.e., to the extent their tax liability in Singapore is reduced from 15% to zero), subject to the provisions of Article 22 (3) of the RP-Singapore tax treaty in relation to Section 34 (C) of the Tax Code. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue Footnotes 1. Section 13(4) Where the Minister is of the opinion that any payment in the nature of income referred to in Section 12(6) or (7) is made for any purpose which will promote or enhance the economic or technological development of Singapore, he may, by notification in the Gazette, provide that the income shall, subject to such conditions as he may impose, be exempt from tax wholly or in part and either generally or in respect of certain classes of persons; and such income shall, as from the date and to the extent specified by the notification be exempt from tax".