ITAD Ruling No. 062-01

July 31, 2001 ITAD RULING NO. 062-01 RP Japan, Article 11 BIR Ruling 232-82 DA-ITAD-062-01 Joaquin Cunanan & Co. , 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave., Makati City Attention: George J. Lavadia Principal Tax Services Department Gentlemen : This refers to your letter dated December 14, 1999, requesting on behalf of your client, Kawasho Corporation Japan (Kawasho), for a ruling that the interest payments on the portion of the loan extended by Kawasho to K & K Molding, Inc. (K & K) which was financed by Export-Import Bank of Japan (Eximbank) (succeeded by Japan Bank for International Cooperation ) are not subject to any Philippine income/withholding tax while the interest payments on the balance of the said loan are subject to the 15% withholding; tax pursuant to the RP-Japan Tax Treaty. It is represented that K & K is a corporation organized and existing under the laws of the Philippines; that on December 10, 1998, K & K entered into a loan agreement with Kasei Industry Co., Ltd. (Kasei) as the guarantor and Kawasho as the lender; that Kawasho and Kasei are non-resident foreign corporations organized and existing under the laws of Japan; that on December 10, 1998, K & K obtained a US$ 5,400,000 loan from Kawasho for its business operations; that US$ 3,240,000 of such loan will be obtained by Kawasho from Eximbank . In reply, please be informed that Article 11 of the RP-Japan Treaty provides as follows: "INTEREST 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 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. xxx xxx xxx Notwithstanding the provisions of paragraph 2 and 3 interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any other financial institution wholly owned by that Government or by any resident of the other Contracting State with respect to debt claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph the term "financial institution wholly owned by the Government" means: DCSTAH a) In the case of Japan, the Export Import Bank of Japan the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 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" Inasmuch as the Eximbank is considered as financial institution wholly owned by the government, the interest payments to be remitted to Kawasho by K & K relative to the portion which was financed by Eximbank shall be exempted from Philippine income tax imposed pursuant to Article 11 (4) of RP Japan Tax Treaty and the portion which was directly financed by Kawasho shall be subject to a tax of 15% of the gross amount of interest imposed pursuant to Article 11 (2) of the RP - Japan Tax Treaty. However, the said loan agreement executed is subject to documentary stamp tax in accordance with Section 180 of the Tax Code, as amended. (BIR Ruling 232-82) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be rendered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group