ITAD Ruling No. 078-05

July 29, 2005 ITAD RULING NO. 078-05 Article 11 of the Philippines-Israel tax treaty BIR Ruling No. DA-ITAD-114-02 Berthaphil, Inc . Berthaphil Compound Jose Abad Santos Ave., CSEZ Clarkfield, Pampanga Attention: Ms. Elizabeth M. Castro President/General Manager Gentlemen : This refers to your letter dated March 10, 2005, seeking to avail of the preferential tax rate of 10% on interest payments made by Berthaphil, Inc. (Berthaphil) to the Union Bank of Israel Ltd. (Union Bank) under the Philippines-Israel tax treaty. It is represented that Union Bank is a corporation organized and existing under the laws of Israel with principal address at Tel Aviv Branch, Tel Aviv, Israel; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated December 6, 2004; that Berthaphil is a corporation organized and existing under the laws of the Philippines with principal address at Berthaphil Compound, Jose Abad Santos Ave.,Clarkfield Pampanga; and that on January 18, 2003 and April 5, 2004, Berthaphil obtained loans from Union Bank in the amount of Eight Hundred Fifty Thousand US Dollars ($850,000.00) and One Million US Dollars ($1,000,000.00) respectively, with an interest of 3.5625% and 3.37%(L+2% percent) per annum above LIBOR. In reply, please be informed that Article 11 of the Philippines-Israel tax treaty provides as follows: "Article 11 "Interest "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. DacASC "2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 percent of the gross amount of the interest. "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 prices attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xxx xxx xxx" Considering that Berthaphil is a resident of Israel within the meaning of the Philippines-Israel tax treaty and is the beneficial owner of the interest arising in the Philippines, the interest payments made by Berthaphil to Union Bank are subject to Philippine income tax at the rate of ten percent (10%) of the gross amount of interest. (BIR Ruling No. DA-ITAD-114-02 dated June 4, 2002) Moreover, the Loan Contracts entered into by and between Berthaphil and Union Bank dated January 16, 2004 and April 5, 2004, respectively, are subject to the documentary stamp tax as follows: (1) for the Loan Contract dated January 16, 2004, it is subject to documentary stamp tax imposed under Section 180 of the NIRC of 1997 at a rate of Thirty Centavos (P0.30) on each Two Hundred Pesos (P200), or fractional part thereof, of the face value of such loan contract; and HEcIDa (2) for the Loan Contract dated April 5, 2004, it is subject to documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243, 1 at a rate of (P1.00) on each Two Hundred Pesos (P200) on fractional part thereof, of the issue price of any such loan contract. This ruling is issued on the basis of the foregoing facts as represented. However, if upon 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. Republic Act No. 9243 An Act Rationalizing The Provisions On The Documentary Stamp Tax Of The National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)