ITAD Ruling No. 087-02

May 9, 2002 ITAD RULING NO. 087-02 Art. 12 (2) RP-US Tax Treaty BIR Ruling No. ITAD-195-00 Transitions Optical Philippines Inc. Block 4, Lot 1, Star Avenue Laguna International Industrial Park Mamplasan, Bian, Laguna Attention: Ms. Suzanne B. Mondonedo Finance Manager Gentlemen : This refers to your letter dated August 23, 2001, requesting for an opinion on the appropriate tax rate to be used on the interest to be paid by Transitions Optical Philippines, Inc. (TOPI) from the intercompany loan with Transitions Optical Inc. (TOI) pursuant to the RP-US tax treaty. It is represented that TOI is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal address at 9251 Belcher Road, Pinellas Park, Florida; 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 July 3, 2001; that TOPI is a corporation duly organized and existing under the laws of the Philippines; that on January 6, 2000, TOPI and TOI entered into a loan agreement whereby the former promised to pay, for value received, One Million US Dollars ($1,000,000.00) to the latter, payable on demand together with interest on such principal amount at the rates decided pursuant to the Credit Agreement. In reply, please be informed that Article 12 paragraph 2 of the RP-US tax treaty which reads, viz : "Article 12 "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. "(3) Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 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 of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State 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. IcHTCS 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." Based on the foregoing, interest payments to a recipient which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten per cent (10%) of the gross amount of interest if with respect to public issues of bonded indebtedness; and a tax rate not exceeding fifteen per cent (15%) of the gross amount of interest in all other cases. Such being the case, and since TOI is not registered to engage in business in the Philippines through a permanent establishment situated therein and the interest is not with respect to public issues of bonded indebtedness, the interest income to be remitted by TOPI to TOI is subject to the preferential tax rate of 15 per cent pursuant to Article 12(2) of the RP-US tax treaty. (BIR Ruling No. ITAD-195-00 dated December 8, 2000) Moreover, the Loan Agreement executed by and between them shall be subject to the documentary stamp tax under Section 180 of the Tax Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service