ITAD Ruling No. 096-05

September 2, 2005 ITAD RULING NO. 096-05 Article 12, Philippines-United States of America; BIR Ruling No. DA-ITAD 187-03 Tan & Concepcion Law Firm Suites 2103-2106 Floor, Ortigas Building San Miguel Avenue, Ortigas Center 1661 Pasig City Attention: Atty. Fides C. Cordero-Tan Atty. Fe L. Concepcion Gentlemen : This refers to your letter dated July 6, 2005, requesting confirmation of your opinion on the appropriate tax rate to be applied on the interest payments by PSi Technologies, Inc. (PSi) to Merrill Lynch Global Emerging Markets Partners, LLC (Merrill) pursuant to the Philippines-United States of America (Philippines-US) tax treaty. It is represented that Merrill is a corporation organized and existing under the laws of the United States of America with office address at World Financial Center, North Tower, 250 Vesey St.,New York; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification of Non-Registration dated July 4, 2005 issued by the Securities and Exchange Commission; that PSi is a corporation organized and existing under the laws of the Philippines with principal address at Electronics Avenue, FTI Complex, Taguig, Metro Manila; that on June 2, 2005, Merrill and PSi entered into a loan agreement whereby the former granted the latter a loan in the aggregate principal amount of Seven Million US Dollars (US$7,000,000.00) plus all accrued and unpaid interest on June 1, 2009 ("Maturity Date");and that the term of the loan is four (4) years with interest at 10% per annum, payable semi-annually on each interest payment date. In reply, please be informed that Article 12 of the Philippines-US tax treaty provides as follows: "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 the 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. cACEHI xxx xxx xxx "5. Paragraphs (2),(3),and (4) shall not apply if the recipient of the 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. 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." "xxx xxx xxx" Based on the foregoing, interest payments to a resident of the United States which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten percent (10%) of the gross amount of interest if such interest payments are with respect to public issues of bonded indebtedness, and a tax rate not exceeding fifteen percent (15%) of the gross amount of interest in all other cases. Such being the case, and since Merrill is not engaged in business in the Philippines through a permanent establishment situated therein and the interest payments in the subject loan are not with respect to public issues of bonded indebtedness, the interest income to be remitted by PSi to Merrill shall be subject to the preferential tax rate of 15 percent (15%), based on the gross amount thereof, pursuant to the Philippines-US tax treaty. (BIR Ruling No. DA-ITAD 187-03 dated December 1, 2003) Moreover, the loan agreement executed by and between Merrill and PSi shall be subject to the documentary stamp tax under Section 179 of the Tax Code of 1997, as amended. This ruling is issued on the basis of the facts as represented. However, if upon investigation 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