ITAD Ruling No. 089-02

May 9, 2002 ITAD RULING NO. 089-02 Article 11, RP-Germany tax treaty ITAD No. 185-00 Luis Caete & Company Certified Public Accountants Kingston Sorel International Oftana Bldg., Jasmin cor. Don Mariano Cui Street 6000 Cebu City Attention: Luis A. Caete Gentlemen : This refers to your application for relief from double taxation dated November 8, 2000 on behalf of Deutsche Telekom AG (DTAG), requesting confirmation that the interest payments made by Consultancy by Technicus Corporation (CbyT) in favor of DTAG are subject to 15% preferential tax rate pursuant to the RP-Germany tax treaty. It is represented that DTAG is a non-resident foreign corporation duly organized and existing under the laws of Germany with principal address at Headquarters Friedrich-Ebert-Allee 140, 53113 Bonn, Germany; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated January 23, 2001 issued by the Securities and Exchange Commission; that CbyT is a corporation duly organized and existing under the laws of the Philippines with principal office address at 6th Floor, Crown Plaza Building, 3rd Avenue, North Reclamation Area, Cebu City; that DTAG is the stockholder of record of CbyT of Fifty Two Thousand Eight Hundred Six (52,806) shares of stocks with a par value of One Hundred Pesos (P100.00) per share or an aggregate amount of Five Million Two Hundred Fifty Thousand Six Hundred Pesos (P5,280,600.00); that a Loan Agreement was entered into by and between DTAG and CbyT summarized as follows: Amount of Amount Outstanding Loan (DEM) Received Loan Interest Rates Due Date Receivables 1. 3,055,243 3,055,243 0 the loan shall be charged the loan shall be due for interest rate of 12-month repayment in the legal LIBOR DEM plus 100% currency of the Federal p.a. which is quoted two Republic of Germany of banking days in London the last banking day of before the start of the December 1999 interest payment period. 2. 6,917,300 6,917,300 0 the loan shall be charged the loan shall be due for interest rate of 6-month repayment in the legal LIBOR DEM plus 100% currency of the Federal p.a. which is quoted two Republic of Germany of banking days in London the last banking day of before the start of the August 1998 interest payment period. 3. 12,000,000 10,000,000 2,000,000 the loan shall be charged the loan shall be due for interest rate of 6-month repayment in the legal LIBOR DEM plus 100% currency of the Federal p.a. which is quoted two Republic of Germany banking days in London one year after the before the start of the disbursal of the tranche interest payment period. In reply, please be informed that Article 11 of the RP-Germany 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. "2. However, such interest may 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: a) 10 percent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of such interest in all other cases. xxx xxx xxx." "4. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived. Based on the aforequoted provision, this Office is of the opinion and so holds that the interest payments to be remitted by CbyT to DTAG pursuant to the Loan Agreement shall be subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Germany tax treaty. (BIR Ruling No. 185-00 dated December 7, 2000) Finally, the Loan Agreement executed 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 shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service