ITAD Ruling No. 097-02

May 16, 2002 ITAD RULING NO. 097-02 Article 11, RP-Japan Treaty BIR Ruling No. 144-95 Ina Research Philippines Phase 2 Block 7 Lot I-A North Science Corner Technology Avenue Laguna Technopark Industrial Estate Bian, Laguna, Philippines Attention: Dr. Noel Lee J. Miranda Vice President for Administration & Finance Gentlemen : This refers to your letter dated August 26, 2000, on behalf of Ina Research Philippines, Inc. (INA), requesting for a tax treaty rate of ten percent (10%) to be withheld on interest payments to Ina Research Inc. (hereinafter referred to as "IRI"), pursuant to the RP-Japan Tax Treaty. It is represented that IRI is a corporation duly organized and existing under the laws of Japan, with principal office at 8047 Nishiminowa, Ina-shi, Nagano-ken, Japan; that IRI 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 7, 2000; that INA is a domestic corporation duly organized and existing under the laws of the Philippines and duly registered as a pioneer enterprise with the Board of Investments with Certificate of Registration No. 94-215 dated May 26, 1994; that per BOI Certificate of Registration No. 97-298 dated December 23, 1997, INA was further registered as a non-pioneer enterprise for purposes of expansion of commissioned research and development activity for pharmaceutical and other related products; and that prior to such registration as non-pioneer enterprise, the following Loan Agreements were entered into by and between IRI and INA; LOAN 1 entered into March 31, 1995, for the amount of One Hundred Five Million Eight Hundred Twenty One Thousand Three Hundred Forty One Yen (105,821,341.00) with an interest rate of four per cent (4%) per year payable within five (5) years ending March 31, 2000. LOAN 2 entered into on September 30, 1995, for the amount of Seventy Million Yen (70,000,000.00) with an interest rate of two decimal point six two five per cent (2.625%) per year payable within five years ending September 30, 2000, LOAN 3 entered into on March 31, 1996, for the amount of Twenty Six Million Six Hundred Thousand Yen (26,600,000.00) with an interest rate of two decimal point six two five per cent (2.625%) per year within seven (7) years ending March 31, 2003. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides as follows: "Article 11 "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed; a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest . "4. . . . "5. The term "interest" as used in this Article 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. xxx xxx xxx" Based on the foregoing, the interest payments will be taxed at a preferential rate of not exceeding ten per cent (10%) if the interest is paid in respect of government securities, or bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and in all other cases, fifteen per cent (15%) of the gross amount of the interest. It must be noted that INA's subsequent registration of its expansion project covering the same pioneering activity does not affect its original status as a pioneer registered enterprise as confirmed by the Board of Investment in its reply letter dated March 22, 2002, a portion of which is quoted below: ". . . the enterprise's registration with the BOI as a pioneer enterprise covered by its first registration remains effective notwithstanding the subsequent registration of its expansion project covering the same pioneering activity." Such being the case and since INA is a pioneer enterprise engaged in preferred pioneer areas of investment under the incentive laws of the Philippines, this Office is of the opinion and so holds that the interest payments to be made by INA to IRI are subject to Philippine final withholding tax rate of 10 per cent of the gross amount of interest pursuant to Article 11(3) of the RP-Japan tax treaty is hereby confirmed. (BIR Ruling No. 144-95 dated September 15, 1995) Moreover, the three (3) Loan Agreement entered into by and between IRI and INA dated March 31, 1995, September 30, 1995 and March 31, 1996, respectively, are subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is 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