ITAD Ruling No. 078-01

September 19, 2001 ITAD RULING NO. 078-01 Article 10 (2), RP-UK Tax Treaty BIR Ruling No. ITAD 138-00 Blue Circle Phils., Inc. 9th Floor, 1004 Antel Corporate Center 139 Valero St., Salcedo Village, Makati Attention: Ms. Marivic C. Espao Tax Partner Gentlemen : This refers to your letter dated April 10, 2001 requesting confirmation of your opinion that the interest payments to be made by Blue Circle Philippines Inc. (BCPI) to Blue Circle Overseas Finance Limited (BCOFL) shall be subject to preferential tax rate of fifteen (15%) per cent under Article 10(2) of the RP-UK Tax Treaty. It is represented that BCOFL is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of the United Kingdom of Great Britain and Northern Ireland with principal address at #84 Eccleston Square, London, SWIV 1PX, United Kingdom; that it is not registered as a corporation or partnership licensed to do business in the Philippines as per certification dated March 22, 2001 issued by the Securities and Exchange Commission; that BCPI is a domestic corporation organized and existing under the laws of the Philippines, with office address at 9th Floor, 1004 Antel Corporate Center 139 Valero St., Salcedo Village, Makati City; that on June 26, 2000, BCPI contracted a loan in the amount of Three Million Pesos (Php3,000,000,000.00) from Blue Circle Industries PLC (BCI), a foreign corporation organized and existing under and by virtue of the laws of the United Kingdom of Great Britain and Northern Ireland; that the proceeds of the loan shall be utilized exclusively for the refinancing of Republic Cement Corp.'s peso loans and investment in Fortune Cement Corp.; that the loan shall be available for drawdown in minimum amounts of P500 million for a period of 6 months from June 26, 2000; that the loan shall be subject to an interest rate equal to the PHIBOR (Philippine Interbank Offered Rate) rate and payable in equal semi-annual installments for five years commencing on the third anniversary of the first drawdown; that BCPI shall have the right at any time to prepay the loan at an amount not less than P60,000,000.00 while BCI, on the other hand, shall have the option to convert, fully or partially, the said loan into equity with BCPI either before maturity of the loan or upon failure of BCPI to pay the loan within the stipulated period; that BCI has assigned all its rights and interests under the Original Loan Agreement to BCOFL; that on March 15, 2001, a supplementary agreement was entered into between BCOFL and BCPI where BCOFL has agreed to extend to an additional facility of Three Hundred Fourteen Million Three Hundred Eighty-Two Thousand Five Hundred Ninety Pesos and Seventy-Eight Centavos (Php314,382,590.78); that BCPI has agreed to abide by the terms and conditions set forth in the Original Loan and Supplementary Agreement as regards its obligations on the loan; that in accordance with the terms and conditions of the Original Loan Agreement, payment on the loan shall commence on the third year anniversary of the first drawdown, thus, BCPI has not yet made any payments on the loan. In reply, please be informed that Article 10 of the RP-UK Tax Treaty provides, viz: "Article 10 INTEREST 1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. xxx xxx xxx 5. The term " interest" as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises . Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. (Emphasis supplied) 6 The provisions of paragraphs (1), (2), and (3) of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional 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 13, as the case may be, shall apply. xxx xxx xxx On the basis of the foregoing, since BCOFL neither carries on a trade or business in the Philippines through a permanent establishment nor renders professional services from a fixed base in the Philippines and being the beneficial owner of the interest income arising in the Philippines, your opinion that the interest income to be earned by BCOFL from the loan it extended to BCPI shall be subject to a preferential withholding tax rate of 15% of the gross amount of the interest pursuant to Article 10(2) of the RP-UK Tax Treaty is hereby confirmed. However, the Original Loan and Supplementary Agreement executed by and between them shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997.[BIR Ruling No. ITAD-138-00 dated September 19, 2000) 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 & Inspection Group