ITAD Ruling No. 060-03

2003 ITAD RULING NO. 060-03 Art. 11, RP-Japan BIR Ruling No. DA-ITAD 211-02 R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Ext. 1200 Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated August 28, 1998 requesting for confirmation of your opinion on the taxation of the interest payments of Japan Aviation Electronics Philippines, Inc. (JAE-Phils.) to Japan Aviation Electronics Industry, Ltd. (JAE-Japan), pursuant to Article 11 of the RP-Japan tax treaty. It is represented that JAE-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 1-1 Mushashino 3 Chome, Akishima-shi, Tokyo, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certification dated November 14, 2002 issued by the Securities and Exchange Commission; that JAE-Phils. is a domestic corporation duly organized and existing by virtue of the laws of the Philippines with principal office located at Gateway Business Park, Bgy. Javalera, Cavite; that JAE-Phils. is a Philippine Export Zone Authority (PEZA) registered enterprise as evidenced by Certificate of Registration No. 96-079 issued on July 2, 1996; and that JAE-Phils. borrowed from JAE-Japan the total amount of US$7,000,000.00 with an interest of three percent (3%) per annum, with the following breakdown, payable within the terms stipulated in the loan agreements: Loan dated July 9, 1996 US$3,000,000.00 Loan dated December 4, 1996 3,000,000.00 Loan dated April 12, 1997 1,000,000.00 Total US$7,000,000.00 ============ In reply, please be informed that Article 11 of the RP-Japan tax treaty provides, viz: ARTICLE 11 "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting 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 Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of interest. SaIHDA "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. "xxx xxx xxx" Based on the aforequoted provisions, interest payments in respect of Government securities, or bonds or debentures will be taxed at a preferential rate of ten per cent (10%) of the gross amount of interest and fifteen per cent (15%) of the gross amount of the interest in all other cases. Such being the case, this Office is of the opinion and so holds that the interest payments of JAE-Phils. to JAE-Japan pursuant to the herein loan contracts are subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 1(2)(b) of the RP-Japan tax treaty . ( BIR Ruling No. DA-ITAD-211-02 dated November 27, 2002 ) Moreover, the three separate Loan Agreements executed by JAE-Phils. and JAE-Japan are subject to documentary stamp tax imposed under Section 180 of the 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service