ITAD Ruling No. 065-02

April 24, 2002 ITAD RULING NO. 065-02 Article 11, RP-Japan ITAD 98-01 Precision Springs Manila, Inc. Light Industry and Science Park II Bo. Real Calamba, Laguna Attention: Ms. Era M. Dela Cerna Accounting Firm Gentlemen : This refers to your application for relief from double taxation filed on November 23, 2001, requesting confirmation of your opinion that the interest payment to be made by Precision Springs Mla. Inc. (PSMI) to Mitsubishi Steel Mftg. Co. Ltd. (Mitsubishi) is subject to the fifteen percent (15 %) preferential tax rate pursuant to the RP-Japan tax treaty. It is represented that Mitsubishi is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 2-22 Harumi 3 chome Chuo-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated March 4, 1999 issued by the Securities and Exchange Commission; that PSMI is a corporation duly organized and existing under the laws of the Philippines with office address at LISP II Bo. Real, Calamba, Laguna; that on February 21, 2001 and March 5, 2001, PSMI and Mitsubishi entered into 2 (two) loan agreements whereby Mitsubishi shall respectively lend to PSMI the amounts of One Hundred Fifty Three Million Japanese Yen (JPY153,000,000) for the purchase of and/or lease of a parcel of land, and Two Hundred Million Japanese Yen (JPY200,000,000) for the purchase of machinery and/or building; and that the said facility loans are payable on February 20, 2002 and March 4, 2002 with an interest rate of 2.55 % per annum. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides as follows: "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 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. ISDHcT "xxx xxx xxx "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. Such being the case, the interest to be remitted by PSMI to Mitsubishi relative to the said loan shall be subject to Philippine withholding income tax at the preferential tax rate of 15% of the gross amount of the interest, pursuant to Article 11(2)(b) of the RP-Japan tax treaty. ( DA-ITAD 98-01 dated October 23, 2001 ) Moreover, Section 180 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "Sec. 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or any or its Instrumentalities, Deposit Substitute, Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand . On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation; and on each renewal of any such note, there shall be collected a documentary stamp tax on Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft; certificate of deposit, or note: Provided , That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: . . ." The same Tax Code 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 Philippines 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. 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 PSMI or Mitsubishi in accordance with the provisions of Revenue Regulations No. 9-2000 1 and 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 Footnotes 1. Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under certain conditions.