ITAD Ruling No. 067-05

June 29, 2005 ITAD RULING NO. 067-05 Philippines-Japan, Article 11 NIRC, Sec. 179 BIR Ruling No. DA-ITAD-171-00; DA-ITAD-25-04 Sunnelit Philippines Corporation #119 Technology Avenue, Special Economic Zone Laguna Technopark, Bian, Laguna Attention: Evangeline H. Reyes General Manager Gentlemen : This refers to your letters dated December 14, 2004 and February 14, 2005 requesting confirmation of your opinion that the interest payments made by your company to Daido Kogyo Co., Ltd. (DAIDO) are subject to the preferential withholding tax rate of fifteen percent (15%) pursuant to Article 11 of the Philippines-Japan tax treaty. It is represented that DAIDO is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at Nansa-Toranomon Bldg.,1-7-13 Nishi-Shinbashi Minato-Ku, Tokyo, Japan; that DAIDO is duly licensed to transact business in the Philippines through the operation of a representative office per certification issued by the Securities and Exchange Commission dated November 12, 2004; that the main purpose of the representative office is to undertake activities such as but not limited to information dissemination, promotion of parent company's product and quality control; that Sunnelit Philippines Corp, (SUNNELIT) is a domestic corporation duly organized and existing under Philippine laws; that SUNNELIT is a PEZA-registered Ecozone Export Enterprise with Registration Certificate No. 02-045 dated September 2, 2002, licensed to engage in the manufacture of hard disk drive (HDD) parts; that on August 6, 2003, DAIDO and SUNNELIT entered into a Loan Agreement (Agreement) whereby the former agreed to lend the latter the amount of US Dollar equivalent of Twenty Million Japanese Yen (JPY20,000,000.00);that under the Agreement, the rate of interest payable shall be 2.5% per annum ;and that the representative office has nothing to do whatsoever in the above Loan Agreement. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: 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 percent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 percent 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 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. 6. The provisions of paragraphs 1, 2 and 3 above 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 Contracting State independent personal 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 above-quoted provisions, interest arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures, and 15 percent (15%) in all other cases. However, the said preferential rates shall not apply if the beneficial owner of the interest carries on business in the Philippines through a permanent establishment and the right or property in respect of which the interest or royalties are paid is effectively connected with such permanent establishment or fixed base. (BIR Ruling No. DA-ITAD-171-00 dated November 7, 2000) In the instant case, while DAIDO maintains a Philippine representative office, it is represented that the said representative office is not privy and does not have any participation whatsoever in the negotiation and implementation of the Loan Agreement so that any income derived by DAIDO independently of its representative office shall be considered income of DAIDO alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989),pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside .The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Such being the case, this Office is of the opinion and so holds that the interest payments by SUNNELIT to DAIDO are subject to the preferential tax rate of 15% pursuant to Article 11 of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-25-04 dated March 11, 2004) Moreover, the Loan Agreement entered into by and between DAIDO and SUNNELIT is subject to the documentary stamp tax of One Peso (P1.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, of the issue price of any such debt instrument, imposed under Section 180 of the National Internal Revenue Code of 1997. CcTIDH 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