ITAD Ruling No. 084-00

August 1, 2000 ITAD RULING NO. 084-00 RP-US Art. 12 ITAD 6-99 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Ms . Mary Assumption S . Bautista Principal, Tax Services Gentlemen : This refers to your letter dated February 15, 1998 requesting confirmation of your opinion that the interests on loans paid by your client, Caterpillar Financial Services Philippines, Inc. (CFSPI) to Caterpillar Financial Services Corporation (CFSC) shall be subject to preferential rate of 15% pursuant to Article 12(2)(a) of the RP-US Tax Treaty. It is represented that CFSPI is a domestic corporation organized and existing under the laws of Philippines; that it is engaged in the business of extending credit facilities to industrial and commercial enterprises and to the business of other financial operations including extending credit facilities by leasing heavy equipment, industrial, machinery engines, generators and other movable property by selling contracts, leases chattel mortgages and other evidence of indebtedness and by discounting or factoring commercial papers or accounts receivable, without engaging in quasi-banking functions; that CFSC is a corporation organized under the laws of Delaware, USA with principal address at 3322 West End Avenue, Nashville, Tennessee, USA; that CFSC is not registered to engage in business in the Philippines as per certification of the Securities and Exchange Commission dated February 15, 1999; that to augment its funds to ensure availability for its business operations, CFSPI entered into lending agreement (Agreement) with CFSC on May 14, 1999 whereby the latter shall send to the former certain sum of money in accordance with the terms and conditions of the Agreement; that the parties further agreed, among others, that the interest rate on the contracted loan shall be determined from time to time by the parties based on either fixed or floating rate and that the manner of repayment of the principal and interest on the loan together with the rate shall be specified in the Drawdown Document. In reply please be informed that Article 12 of the RP-US Tax Treaty provides as follows: "INTEREST 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. xxx xxx xxx 5. Paragraphs (2), (3), and (4) shall not apply if the recipient of interest from sources within one Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State or through a permanent establishment situated therein or performs in that other State independent personal 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 a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx 7. The term "interest" as used in this Convention 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 as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." Since CFSC is not registered to engage in business in the Philippines through a permanent establishment situated therein, your opinion that income earned by CFSC from the loan it extended to CFSPI shall be plainly considered as interest income subject to 15% withholding tax pursuant to Article 12(2) of the RP-US Tax Treaty is hereby confirmed. (ITAD Ruling 6-99) However, the Loan Agreement 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 being 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 rendered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group