ITAD Ruling No. 060-02

April 24, 2002 ITAD RULING NO. 060-02 Art. 11, RP-Belgium BIR Ruling No. ITAD-191-00 Baxter Healthcare Phils. Inc. 19/F Wynsum Corporate Plaza Emerald Avenue, Ortigas Center Pasig City Attention: Ms. Ana T. Chan Asst. Finance Manager Gentlemen : This refers to your letter dated October 24, 2001 requesting for tax treaty relief to avail of the preferential tax rate of ten per cent (10%) final withholding tax on the interest remittances by Baxter Healthcare Philippines Inc. (BHPI) to Baxter World Trade SA (BWTsa) pursuant to the RP-Belgium tax treaty. It is represented that BWTsa is a non-resident foreign corporation duly organized and existing under the laws of Belgium with principal office located in Boulevard de la Plaine 5-1050 Bruxelles; 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 September 12, 2000; that Baxter Healthcare Philippines Inc. (BHPI) is a corporation duly organized and existing under Philippine laws with principal office located at 19/F Wynsum Corporate Plaza, Emerald Avenue, Ortigas Center, Pasig City; that BHPI obtained the following intercompany loans as evidenced by the promissory notes executed with BWTsa, viz : Amount of Loan Date of Intercompany Loan Terms of Payment 2,500,000 March 22, 1996 With interest on each Advance which or will be at the rate of LIBOR (London Optional Currency Interbank Offered Rate) plus of 1% per annum based on a 360-day year for the actual number of days elapsed. 15,000,000 November 15, 1997 With interest on each Advance which or will be at the rate of LIBOR (London Optional Currency Interbank Offered Rate) plus of 1% per annum based on a 360-day year for the actual number of days elapsed. In reply, please be informed that Article 11 paragraph 2 of the RP-Belgium tax treaty provides, viz : "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 beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. "3. Notwithstanding the provisions of paragraph 2, interest shall be exempted from tax in the Contracting State in which it arises if it is: a) interest paid in respect of a bond, debenture or other similar obligation of the Government of that Contracting State or of a political subdivision or local authority thereof; and b) interest paid in respect of a loan made, guaranteed or insured or a credit extended, guaranteed or insured by such institution as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. "4. 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 or taxed in the same way as income from money lent by the taxation law of the State in which the income arises, including interest on deferred payments. However, the term "interest" shall not include for the purpose of this Article interest regarded as dividends under paragraph 3 of Article 10. "5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx." Based on the foregoing, interest arising in a Contracting State will be taxed at a preferential tax rate not exceeding ten percent (10%) if the beneficial owner of the interest is a resident of the other Contracting State. On the other hand, interest payments in respect of a bond, debenture or other similar obligation of the Government of a Contracting State or of a political subdivision or local authority and interest payments in respect of a loan made, guaranteed or insured or a credit extended, guaranteed or insured by an institution as specified and agreed by the Contracting States shall be exempt from tax if the beneficial owner is a resident of the other Contracting State. Such being the case and since BWTsa is not registered to engage in business in the Philippines through a permanent establishment situated therein and the interest is not with respect to any of the conditions stated above that would merit exemption from tax, the interest payments to be remitted by BHPI to BWTsa are subject to the preferential tax rate of ten per cent (10%) of the gross amount of interest pursuant to Article 11, paragraph 2 of the RP-Belgium tax treaty. (BIR Ruling No. ITAD-191-00) Finally, the promissory notes executed by and between BHPI and BWTsa shall be subject to the documentary stamp tax under Section 180 of the Tax Code of 1997. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service