ITAD Ruling No. 075-05

July 27, 2005 ITAD RULING NO. 075-05 Article 11, Philippines-Japan tax treaty Section 180, National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 99-04 BIR Ruling No. DA-ITAD 44-02 ABC Asia Pacific Business Legal Consulting 2nd Floor, Building B, Mactan Marina Mall Mactan Economic Zone I Pusok, Lapulapu City Cebu Attention: Atty. Ramonito G. Antig Partner Gentlemen : This refers to your letter dated April 5, 2005 requesting confirmation that interest to be paid by Philippine Iino Corporation (Iino Philippines) to Iino Seisakusho Company, Ltd . 1 (Iino Japan) is subject to 15 percent income tax pursuant to Article 11 of the Philippines-Japan tax treaty. It is represented that Iino Japan is a nonresident foreign corporation organized and existing under the laws of Japan, with principal office at 1-135 Juno-chou, Omiya-ku, Saitamashi, Saitama-ken, 330-0024 Japan; that Iino Japan is engaged primarily in the manufacture and sale of spare parts used in automobiles, motorbikes, shipping vessels, and agricultural machineries; that Iino Japan is not registered as a corporation or as a partnership licensed to engage in business in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated April 19, 2005 issued to it by the Securities and Exchange Commission; that, on the other hand, Iino Philippines is a domestic corporation organized and existing under the laws of the Philippines, with principal office at Dinagyang Street, Mactan Economic Zone II, Special Economic Zone, Basak, Lapulapu City, Cebu, Philippines; that on June 28, 2002, Iino Japan and Iino Philippines entered into a Contract of Loan whereby Iino Japan agreed to extend to Iino Philippines a loan amounting to 250,000,000 Japanese Yen, to be released as follows: on August 2002 (JPY 100,000,000), March 2003 (JPY50,000,000), October 2003 (JPY50,000,000), and November 2003 (JPY50,000,000); that the loan was credited to Iino Philippines' Rizal Commercial Banking Corporation (the Bank) account on August 21, 2002 (JPY100,000,000), March 6, 2003 (JPY50,000,000), October 3, 2003 (JPY50,000,000), and November 18, 2003 (JPY50,000,000), as confirmed by the relevant Certification dated February 18, 2005 issued by the Bank; and that in consideration, Iino Philippines shall pay Iino Japan interest at an initial rate of 3 percent per annum, which shall escalate at 3.54 percent per annum beginning April 2004. In reply, please be informed that interest to be paid by Iino Philippines to Iino Japan under the aforementioned Contract of Loan is subject to the reduced rate of tax under Article 11 of the Philippines-Japan tax treaty, to wit: "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 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. EACIaT "xxx xxx xxx" Accordingly, since the subject interest is not paid in respect of government securities, bonds, or debentures, nor it is paid by a company registered with the Board of Investments, such interest to be paid by Iino Philippines to Iino Japan under the aforementioned Contract of Loan is subject to 15 percent income tax based on the gross amount of the interest. (BIR Ruling No. DA-ITAD 99-04 dated September 7, 2004). Finally, the Contract of Loan between Iino Philippines and Iino Japan is subject to documentary stamp tax (DST) imposed under Section 180 of the National Internal Revenue Code of 1997: "SEC 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of 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 of 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: Provided, however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this Section." (BIR Ruling No. DA-ITAD 44-02 dated April 5, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service Footnotes 1. In Japanese, K.K. Iino Seisakusho; K.K. or Kabushiki Kaisha means Company Ltd.