ITAD Ruling No. 075-01

September 11, 2001 ITAD RULING NO. 075-01 RP-Japan Article 11 BIR Ruling ITAD 48-99 Philippine Denrai, Inc. Blk. 3 Lot 5 Phase II PEZA CEPZ Rosario Cavite 4106 Attention: Mr. Hiroshi Takiguchi General Manager Gentlemen : This refers to your letter dated November 8, 2000, on behalf of Denrai Kohbo Co., Ltd. (DKC) requesting for a preferential tax rate of fifteen percent (15%) to be withheld on interest payments to DKC by your company, Philippine Denrai, Inc. (PDI) pursuant to the RP-Japan Tax Treaty. It is represented that DKC is a non-resident foreign corporation organized and existing under the laws of Japan with principal address at 45 Ninodancho Shinden Kissyoin Minami-ku, Kyoto, Japan; that DKC is not registered either as a corporation/partnership licensed to do business in the Philippines as per certification dated October 26, 2000 issued by the Securities and Exchange Commission; that PDI is a corporation organized and existing under the laws of the Philippines and duly registered with the Philippine Economic Zone Authority with Certificate of Registration No. 99-017 dated March 25, 1999 with principal address at BLK. 3 Lot 5 Phase II PEZA CEPZ, Rosario, Cavite; that the Monetary Agreements by and between DKC and PDI are as follows: Loan I entered into on September 16, 1999, amounting to Fifty Million Japanese Yen (50,000,000.00) with an interest rate of 2.3% per annum, payable not later than August 31, 2000, Loan II entered into on July 16, 1999, amounting to Ten Million Japanese Yen (10,000,000.00) with an interest rate of 2.3% per annum, payable not later than June 30, 2001; that the interests on the foregoing loans shall be paid after the payment of the respective principal amounts; and that DKC, as per agreement with PDI, can and/or may offset the loan amount of the agreement with the price of imported stock (goods) coming from PDI. 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; cACDaH "(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. "xxx xxx xxx" The term "interest" is generally taken to mean remuneration on money lent being remuneration coming within the category of income from movable capital. It designates, in general, income from debt claims of any kind, whether or not secured by mortgage and whether or not carrying rights to participate in profits. (OECD Model Tax Convention) Such being the case, the interest income to be remitted by PDI to DKC relative to the aforementioned loans shall be subject to the preferential tax rate of 15%. (BIR Ruling No. 48-99, dated December 9, 1999) Moreover, the Monetary Agreements executed by and between them shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. This ruling is 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group