ITAD Ruling No. 098-01

October 23, 2001 ITAD RULING NO. 098-01 RP-Japan, Article 11 (2) BIR Ruling No. 142-95, 26-00 Sycip Gorres Velayo & Co. 6th Floor Ayala Life FGU Center Mindanao Avenue cor Biliran Road Cebu Business Park, Cebu City Gentlemen : This refers to your application for relief from double taxation dated June 4, 2001, on behalf of Toyoflex Corporation (Toyoflex-Japan), requesting confirmation of your opinion that the interest payment to be made by Toyoflex Cebu Corporation (Toyoflex-Cebu) is subject to the 15% preferential tax rate pursuant to the Article 11(2)(b) of the RP-Japan Tax Treaty It is represented that Toyoflex-Japan is a corporation organized and existing under the laws of Japan with office address at 1-25-19, Fuchu-cho, Fuchu-shi, Tokyo, Japan; that Toyoflex-Japan is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as per certification dated March 28, 2001 issued by the Securities and Exchange Commission; that Toyoflex-Cebu is a corporation duly organized and existing under laws of the Philippines with office address at Mactan Economic Zone I, Lapu-Lapu City; that Toyoflex-Japan owns 99.99% of the total stockholdings of Toyoflex-Cebu equivalent to 571,976 shares of stocks; that on April 20, 2001, a Loan Agreement was entered into by and between Toyoflex-Japan and Toyoflex-Cebu whereby Toyoflex-Japan shall lend the amount of Ten Million Japanese Yen (JY10,000,000) to Toyoflex-Cebu; that this same amount was advanced by Toyoflex-Japan to Toyoflex-Cebu for working capital purposes on July 5, 2000 when the Loan Agreement took effect; and that the said loan is payable on July 4, 2001 with an interest rate of 2% per annum. 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. 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. xxx xxx xxx." Such being the case, the interest to be remitted by Toyoflex-Cebu to Toyoflex-Japan relative to the said loan shall be subject to Philippine withholding income tax at the preferential tax rate of 15% of the gross amount of the interest, pursuant to Article 11(2)(b) of the RP-Japan Tax Treaty. (BIR Ruling No. 142-95) Moreover, Section 180 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : HDIaET "SEC. 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or any or its Instrumentalities, Deposit Substitute, Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand . On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax on Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided , That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: . . . " The same Tax Code provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippines sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either party, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In view thereof; the documentary stamp tax (including penalties thereto, if there are any) on the Loan Agreement must be paid and the corresponding return thereon be filed by either Toyoflex-Japan or Toyoflex-Cebu in accordance with the provisions of Revenue Regulations No. 9-2000 1 and the Tax 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group Footnotes 1. Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under certain conditions.