ITAD Ruling No. 055-05

June 16, 2005 ITAD RULING NO. 055-05 Article 11, Philippine-Netherlands tax treaty Sec. 108 of the Tax Code of 1997; BIR Ruling Nos. DA-ITAD-25-02; 168-02 FMC Marine Colloids, Inc. Ouano Compound, Looc, Mandaue City, Cebu 6014 Attention: Atty. Regino B. Tambago, Jr. Gentlemen : This refers to your application for tax treaty relief dated February 28, 2005 requesting confirmation that the interest payments made by FMC Marine Colloids (Philippines), Inc. (FMC Phils.) to FMC Finance BV for the loan granted by the latter is subject to the withholding tax at the preferential tax rate of ten percent (10%) pursuant to Article 11 of the Philippines-Netherlands Tax Treaty. It is represented that FMC Finance BV is a non-resident foreign corporation duly organized and existing as a financial institution under the laws of The Netherlands with principal place of business at Strawinskylaan 3105, 1077 ZX Amsterdam, The Netherlands; 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 November 18, 2004; that FMC Phils. is a corporation duly organized and existing under the laws of the Philippines with principal address at Ouano Compound, Looc, Mandaue City; that it is primarily engaged in the business of manufacturing and selling of carrageenan; that on October 7, 2004, FMC Phils. and FMC Finance BV entered into an Intercompany Credit Agreement whereby the former desires to borrow from the latter and the latter desires to lend the former from time to time, as funds become available at FMC Finance BV, up to an aggregate principal amount not to exceed Five Million US Dollars (US$5,000,000.00); that on December 15, 2004, a loan agreement was entered into between FMC Finance BV and FMC Phils. whereby the latter is granted a loan by the former in the amount of Four Million US Dollars (US$4,000,000.00) with repayment date on October 1, 2007; that in consideration for such loan agreement, FMC Phils. executed a Promissory Note (PN) in favor of FMC Finance BV, subject to the terms and conditions stated therein; that per certification issued by a Citiservice Officer from Citibank dated January 7, 2005, Citibank N.A. received the inward remittance of FMC Finance BV in favor of FMC Phils. credited to its USD Current Account 0/850492/034 in the amount of Four Million US Dollars (US$4,000,000.00); that FMC Phils. shall repay the amount borrowed under the repayment date, that is, October 1, 2007 and any prepayments of the principal amount in whole or in part are permitted at any time without penalty; that the amount loaned shall bear interest at the rate of 6-month Libor plus 50 basis points (50%) at the time of the borrowing, which interest shall be paid and remitted to FMC Finance BV every April 1st and October 1st of each year that the PN is in force, provided, however, that if interest is not paid on the interest payment date, then the amount of interest due shall be added to the principal amount and interest shall be compounded on such amount. In reply, please be informed that Article 11 of the Philippines-Netherlands tax treaty provides as follows: "Article 11 "INTEREST "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. AcSCaI "2. However, such interest may also be taxed in the 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 if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations. 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 Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law 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-mentioned provisions, the interest income received by the beneficial owner of the interest who is a resident of The Netherlands and does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten percent (10%) of the gross amount of such interest if, among others, the loan (of whatever kind) was granted by a bank or any financial institution. Such being the case, this Office is of the opinion and so holds that the interest income to be remitted by FMC Phils. to FMC Finance BV, a registered financial institution in The Netherlands, relative to the loan shall be subject to the preferential tax rate of ten percent (10%) of the gross amount of the interest pursuant to Article 11 (2) (a) (ii) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 168-02 dated September 30, 2002 and BIR Ruling No. ITAD 25-02 dated March 6, 2002) Moreover, the Loan Agreement executed by and between them pursuant to the Intercompany Credit Agreement shall be subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code (NIRC) of 1997, as amended. The same Tax Code also provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. HEIcDT In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the Loan Agreement must be paid and the corresponding return thereon be filed by either FMC Phils. or FMC Finance BV in accordance with the provisions of the Revenue Regulations No. 9-2000 (Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions) and the same Tax Code of 1997. 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