ITAD Ruling No. 093-01

October 19, 2001 ITAD RULING NO. 093-01 Article 11 (2), RP-Singapore BIR Ruling No. ITAD 128-00 and BIR Ruling No. 094-96 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati City Attention: Mr. Lauris L. Dela Pea Tax Partner Gentlemen : This refers to your application for relief from double taxation dated March 22, 2001, on behalf of your client, NEC Technologies Phils., Inc. (NTEP), requesting confirmation of your opinion that the interest payments of NTEP to NEC Business Coordination Centre (Singapore) Pte., Ltd. (NEC BCCS) are subject to the preferential tax rate of fifteen (15%) per cent under Article 11(2) of the RP-Singapore Tax Treaty. It is represented that NEC BCCS is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Singapore with principal address at #7 Temasek Boulevard #07-01/03 Suntec Tower One, Singapore; that it is registered and licensed by the Securities and Exchange Commission to establish a regional or area headquarters in the Philippines subject to the provisions of the Omnibus Investments Code of 1987 and its implementing rules and regulations as evidenced by S.E.C. License No. F-1997-00009 dated May 7, 2001; that NTEP is a domestic corporation organized and existing under the laws of the Philippines, with office address at the Mactan Economic Zone, Lapu-Lapu City, Cebu; that by virtue of a Loan Agreement dated February 20, 2001, NTEP contracted two (2) interest-bearing loans with NEC BCCS amounting to Eight Hundred Thousand Dollars (US$800,000.00) each with drawdown dates at the time of the execution of the Agreement (i.e., February 20 and 26, 2001, respectively); that NTEP shall be charged for interests at the annual rate of 5.70% and 5.65% for the loans respectively contracted on February 20 and February 26, 2001; that both loans shall be repayable on March 26, 2001. In reply, please be informed that Article 11 of the RP-Singapore Tax Treaty provides, viz : "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 if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the interest, being a resident of a Contracting State, carries on in the other Contracting State in which the interest arises a trade or business 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 a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx In other words, if the recipient of the income is the beneficial owner of the interest, the tax so charged shall not exceed 15% of the gross amount of the interest. This, however, does not apply if the recipient of the interest, being a resident of a Contracting State (Singapore), carries on in the other Contracting State (Philippines) in which the interest arises, a trade or business through a permanent establishment situated therein. As regards the definition of the term "permanent establishment", Article 5 of the RP-Singapore Tax Treaty provides, viz: "Article 5 "PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes specially but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx On the basis of the aforegoing, since the activities of the regional or area headquarters established in the Philippines by a multinational corporation shall be limited only to acting as a supervisory, communications and coordinating center for its subsidiaries, affiliates and branches in the Asia Pacific Region, then NEC BCCS' registration as a regional or area headquarters in the Philippines pursuant to Article 58 of Executive Order 226, otherwise known as the Omnibus Investments Code of 1987, will not create a "permanent establishment" within the purview of Article 5 of the RP-Singapore Tax Treaty. (BIR Ruling No. 094-96 dated August 30, 1996) In view thereof, since the subject interest income of NEC BCCS is not attributable to a permanent establishment situated in the Philippines 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 payments by NTEP to NEC BCCS relative to the loan shall still qualify to a preferential withholding tax rate of 15% of the gross amount of the interest pursuant to Article 11(2) of the RP-Singapore Tax Treaty, is hereby confirmed. 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. [BIR Ruling No. ITAD-128-00 dated September 1, 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