ITAD Ruling No. 099-05

September 7, 2005 ITAD RULING NO. 099-05 Article 11 of the Philippines-Japan tax treaty Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Mr . Romeo H . Duran Tax Principal Gentlemen : This refers to your letter dated March 23, 2005 on behalf of your client Mitsui & Co., Ltd. (Mitsui), requesting confirmation of your opinion that the interest received by Mitsui from Coral Bay Nickel Corporation (CBNC) are exempt from Philippine income tax pursuant to the Philippines-Japan tax treaty, and that consequently, CNBC is not required to withhold final tax on the interests due on the loan. It is represented that Mitsui is a corporation duly organized and existing under the laws of Japan with principal address at 2-1, Ohtemachi 1-Chome, Chiyoda-ku Tokyo, Japan; that Mitsui has a branch office in the Philippines; that on the other hand, CBNC is a corporation duly organized and existing under the laws of the Philippines with principal address at 24th Floor, Pacific Star Building, Makati Avenue corner Sen. Gil Puyat Avenue, Makati City; that on November 10, 2003, Mitsui and CBNC executed a contract of loan denominated as "Term Loan Agreement" (Agreement), whereby Mitsui agreed to grant loans to CBNC in an aggregate amount not to exceed Six Million Six Hundred Fifteen Thousand US Dollars (US$6,615,000.00); that the interest will be payable on the unpaid principal amount of the loans at the agreed interest rate; that CBNC shall pay interest in arrears on the unpaid principal amount of the loan from the date the first loan is made until such principal amount is paid in full; that the Philippine branch of Mitsui has no participation, directly or indirectly, in the Agreement between Mitsui and CBNC, and that the income derived by Mitsui from said transactions is neither attributable to its Philippine branch nor paid or coursed through it; that pursuant to the Agreement, all loan proceeds advanced therein were sent by wire transfer in immediately available funds to the demand deposit account of CNBC in Bank of Tokyo-Mitsubishi, Manila Branch, as evidenced by the Certificate of Inward Remittances No. CIR05-352058 dated January 13, 2005, issued by the said bank; that the amounts extended by Mitsui to CBNC under the said Agreement were insured by Nippon Export and Investment Insurance (NEXI) under Overseas United Loan Insurance (Loan) Policy No. 10-03-660032, issued on November 27, 2003; and that NEXI is a Japanese export credit agency the capital of which is wholly owned and fully funded by the Japanese government and that NEXI functions as a financial institution to which the Ministry of Economy, Trade and Industry, Japan (METI) transferred some of its services including trade insurance service, export credit agency and investment insurance service. In reply, please be informed that Article 11 of Philippines-Japan tax treaty provides: "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. aHcACI "4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: (a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency: (b) In the cast of the Philippines, the Development Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. "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" In view of the foregoing provisions and considering that NEXI is a Japanese export credit agency, the capital of which is wholly owned and fully funded by the Japanese government (BIR Ruling No. ITAD-21-99 dated August 24, 1999), this Office is of the opinion and so holds that the interest income received by Mitsui from CBNC on a loan guaranteed by NEXI under the Term Loan Agreement is exempt from Philippine income tax and consequently to withholding tax. 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue