ITAD Ruling No. 099-03

July 16, 2003 ITAD RULING NO. 099-03 RP-Belgium Art. 11; RP-Austria Art. 11; RP-Japan Art. 11 and RP-Italy Art. 11 BIR Ruling DA-ITAD 164-95 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law Office Sycip Law-All Asia Capital Center 105 Paseo de Roxas, Makati City 1226 Metro Manila Attention: Atty. Hector M. de Leon, Jr. Atty. Benedicto P. Panigbatan Gentlemen : This refers to your letter dated June 8, 2001 and October 28, 2002 requesting for a ruling confirming your position on the applicability of the preferential tax treaty rates on the resulting interest income under the Omnibus Credit and Security Agreement (the Agreement) dated August 18, 2000 between CBK Power Company Limited (CBK) and Fortis Bank S.A./N.V. (Fortis), Industrial Bank of Japan (IBJ), Raiffesen Zentral Bank Osterreich AG (RZB), and Unicredito Italiano S.P.A. (Unicredito). It is represented that CBK Power Company Limited (CBK) is a limited partnership duly organized and existing under and by virtue of the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company Registration No. A200004027 dated October 9, 2001, with business address at 29th Floor, LKG Tower, 6801 Ayala Avenue, Makati City; that CBK is registered with the Board of Investment (BOI) under Certificate of Registration No. 99-016 dated May 6, 1999 as a new Operator of Hydroelectric Power Generating Plants on a Pioneer Status pursuant to the Omnibus Investment Code of 1987; that Fortis is a financing institution domiciled in Belgium as evidenced by a Tax Residence Certificate issued by the tax authorities of the Kingdom of Belgium; that Fortis' participation as lender was assigned to it by Fortis (Nederland) pursuant to their Assignment and Assumption Agreement executed on October 1, 2001; that IBJ is a financing institution with residence in Japan as certified by the Kojimachi Tax Office; that RZB is a financing institution domiciled in Austria as evidenced by a Certificate of Residence issued by the Austria Financial Administration; that Unicredito is a banking institution domiciled in Italy as set out in Article II of Unicredito's Articles of Association; that Fortis, IBJ, RZB and Unicredito are not registered either as corporations or as partnerships and have not the been licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission dated April 23, 2001 for IBJ and April 30, 2003 for the others; that Fortis, IBJ, RZB, and Unicredito are parties to the subject Agreement; that the Agreement provides for three types of loans, namely: the PRI Facility (PRI Loan), the Debt Reserve Facility (Debt Service Loan), and the Performance Security Facility (Performance Loan); that pursuant to the Agreement, CBK will pay interest on the loans to its lenders from time to time; that as of February 2001, CBK has availed of PRI Loan only; that RZB and Unicredito entered into the Agreement through their respective Singapore branch, while IBJ entered into the Agreement through its Hong Kong branch. cDICaS In reply, please be informed of the following: 1. Whether a loan obtained through the branch sets aside the residence of the parent company in favor of the branch for tax treaty relief purposes . The mere fact that the participation of a parent company as lender under a loan agreement is made through a branch does not obviate the operation of the provisions of the tax treaty with the residence country of the former since a branch has no distinct and separate juridical personality from that of its parent company. Thus, in a case involving a loan contracted by a Philippine corporation with the Hong Kong branch of a bank organized and existing under Austrian law, the BIR, in applying the provisions of the RP-Austria tax treaty, ruled that: " The fact that the loan was secured through the Hong Kong branch of LBA (the Austrian parent company) does not affect the tax treatment of interest earned therefrom, considering that a branch has no distinct and separate juridical personality from that of its mother company ." [ BIR Ruling No. 164-95 dated October 23, 1995 ] 2. On the applicable provisions of the relevant tax treaties . Article 11 of the RP-Belgium tax treaty : " 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 also 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 amount of the interest; "3. . . . "4. . . . "5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but 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 in which the income arises. Penalty charges for late payments shall not be regarded as interest for the purpose of this Article." "xxx xxx xxx" Article 11 of the RP-Japan tax treaty : " INTEREST "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 but 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" Article 11 of the RP-Austria tax treaty : " INTEREST "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. DSETac "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 by a resident of the Philippines to a resident of Austria in respect of public issues of bonds, debentures or similar obligations. "b) 15 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph 2, the amount 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 Austria, 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 but 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 prices attaching to such securities, bonds or debentures. Article 11 of the RP-Italy tax treaty : " 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 10 per cent of the amount of the interest in respect of public issues of bonds, debentures, or similar obligations and paid by a resident of one Contracting State to a resident of the other Contracting State and 15 per cent of the amount of interest in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State if: "a) the payer of the interest is the Government of that Contracting State or a local authority thereof; or "b) the interest is paid to the Government of the other Contracting State or local authority thereof or any agency or instrumentality (including a financial institution) wholly owned by that other Contracting State or local authority thereof; or "c) the interest is paid to any other agency or instrumentality (including a financial institution) in relation to loans made in application of an agreement concluded between the Governments of the Contracting States. HECaTD 4. The term "interest" as used in this Article means income from debt claims of every kind, whether or not secured by mortgage but 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 prices attaching to such securities, bonds or debentures as well as all other income assimilated to income from money lent by the taxation law of the state in which the income arises. "xxx xxx xxx" Based on the aforequoted provisions of the Philippines' tax treaties with Japan and Austria, interest payments will be taxed at a preferential rate of not exceeding ten per cent (10%) of the amount of the interest if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and is engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines, to a resident of Japan and Austria, who is the beneficial owner of the interest. On the other hand, the rate of tax imposed by the Philippines on the interest paid by a Philippine resident to a resident of Belgium and Italy who is the beneficial owner of interest, shall not exceed ten per cent (10%) of the amount of the interest in respect of public issue, bonds, debentures, or similar obligation. In cases other than all of the above, the applicable tax rate shall be fifteen per cent (15%) of the amount of the interest. Such being the case and since CBK is engaged in preferred pioneer areas of investment, this Office is of the opinion and so holds that the interest payments to be made by CBK to IBJ and RZB are subject to Philippine final withholding tax rate of ten per cent (10%) of the gross amount of interest pursuant to Article 11 of the RP-Austria and RP-Japan tax treaties. On the other hand, the interest payments of CBK to Fortis and Unicredito are subject to fifteen per cent (15%) final withholding tax rate pursuant Article 11 of the RP-Belgium, and RP-Italy tax treaties. This ruling is issued on the basis of 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service