ITAD Ruling No. 068-03

May 5, 2003 ITAD RULING NO. 068-03 Art. 11, RP-Japan Tax Treaty BIR Ruling No. DA-ITAD-112-02 Joaquin Cunanan & Co. Unit 306, Keppel Center Samar Loop corner Cardinal Rosales, Ave. Cebu Business Park 6000 Cebu City Attention: Mr. Victor O. Machacon Partner, Assurance and Business Advisory Services Gentlemen : This refers to your application for tax treaty relief dated January 4, 2002, on behalf of your client, Taiheiyo Cement Corporation (Taiheiyo Cement), requesting confirmation of your opinion that the tax on the interest income earned on loans granted by Taiheiyo Cement to Grand Cement Corporation (Grand Cement) should not exceed 15% pursuant to Article 11 of the RP-Japan tax treaty. It is represented that Taiheiyo Cement is a corporation organized and existing under the laws of Japan with principal address at 3-8-1 Nishikanda, Chiyoda-ku, Tokyo 101-8357, 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 issued by the Securities and Exchange Commission dated February 24, 2003; that Grand Cement is a corporation duly organized and existing under the laws of the Philippines with principal address at 6th Floor, Insular Life Bldg., Gen. Maxilom corner Gorordo Ave., Cebu City; that on November 6, 2000, Taiheiyo Cement entered into a loan agreement with Grand Cement whereby the former granted the latter a loan in the amount of 3,174,041,870; that the said loan has a term of 3 years with an interest rate of 15% per annum. In reply, please be informed that Article 11 of the RP-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 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 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." ETCcSa Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at a rate not to exceed 15 per cent (15%) of the gross amount of the interest provided the recipient is the beneficial owner of the interest and that said income was not generated from Government securities, bonds or debentures. Therefore, the interest paid by Grand Cement to Taiheiyo Cement, which is the beneficial owner thereof, shall be subject to fifteen (15%) per cent of the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. However, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 180 of the 1997 Tax Code. ( BIR Ruling No. ITAD-112-02 dated May 31, 2002 ) 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. cCSDTI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service