ITAD Ruling No. 099-04

September 7, 2004 ITAD RULING NO. 099-04 Article 11, Philippines-Japan tax treaty BIR Ruling No. 142-95 SyCip Gorres Velayo & Co. 2F Blk. A Mactan Marina Mall Pusok, Lapu-Lapu City 6015 Cebu Philippines Attention: Rita A. S. Fernandez Gentlemen : This refers to your application for tax treaty relief dated May 21, 2004, on behalf of your client, Philippine Kenko Corporation (PKC), requesting confirmation of your opinion that the interest payments of PKC to Kenko Co., Ltd. shall be subject to the preferential income/withholding tax rate of 15% under Article 11 of the Philippines-Japan Tax Treaty. It is represented that PKC is a domestic corporation organized and existing under Philippine laws with principal office at Mactan Economic Zone I, Lapulapu City; that it is duly registered with the Philippine Economic Zone Authority (PEZA) as an export-oriented enterprise and is currently subject to the 5% preferential tax rate under Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995; that Kenko Co., Ltd., is a nonresident foreign corporation organized and existing under the laws of Japan with principal place of business located at Nishi-Ochiai 3-9-19, Shinjuku-ku, Tokyo, 161-8570, Japan; that Kenko Co., Ltd. is not registered either as a corporation or as a partnership in the Philippines per certification dated May 19, 2004 issued by the Securities and Exchange Commission; and that on April 19, 2004, PKC and Kenko Co. Ltd. formally entered into a Loan Agreement (Document of Consumption Loan Contract) whereby PKC borrowed from Kenko Co. Ltd. the amount of One Hundred Ten Million Japanese Yen (JP110,000,000) drawn as follows: August 20, 2003 JP85,000,000 & September 7, 2003 JP25,000,000, with an interest rate of 1.5% per annum. In reply, please be informed that Article 11 of the Philippines-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. xxx xxx xxx "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." Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at a rate not to exceed 15 percent (15%) of the gross amount of the interest provided the recipient is the beneficial owner of the interest and that said income was not paid in respect of Government securities, bonds or debentures. Thus, the interest paid by PKC to Kenko Co., Ltd., which is the beneficial owner of such interest, shall be subject to Fifteen (15%) percent of the gross amount of the interest pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. ( BIR Ruling No. 142-95 ) However, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act 9243, which became effective on March 20, 2004. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service