ITAD Ruling No. 107-02

May 28, 2002 ITAD RULING NO. 107-02 RP-Japan Article 11 NIRC Sec. 180 BIR Ruling No. ITAD-186-00 Philippine National Oil Company PNOC Building VI, Energy Center, Merritt Road, Fort Bonifacio Attention: Bernadette B. Jugan Manager, Legal Department Gentlemen : This refers to your letter dated September 10, 2001 requesting confirmation of your opinion that interest payments on loan made by the PHILIPPINE NATIONAL OIL COMPANY ("PNOC") from IBJ LEASING CO., CAYMAN OFFICE (IBJ Cayman Office) are subject to a preferential withholding tax rate of fifteen per cent (15%) pursuant to Article 11(2)(b) of the RP-Japan tax treaty. Documents submitted show that IBJ Cayman Office is an offshore bank of IBJ Leasing Co., Ltd of Japan, existing and organized under the laws of Japan, with address at 3-19 Kyobashi 2-Chome, Chuo-Ku, Tokyo 104-8360, Japan and its Cayman office is located at Ugland House, P.O. Box 309, Grand Cayman Islands, British West Indies; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per Certificate of Non-registration issued by the Securities and Exchange Commission (SEC) dated August 22, 2001; that PNOC is a Philippine government-owned and controlled corporation created by virtue of Presidential Decree No. 334; that on March 26, 2001, a Two Hundred Million US Dollars (US$200,000,000.00) loan facility was made available to PNOC as borrower by a group of banks; that one of the lender banks is IBJ Leasing Co., Cayman Office with a participated amount of Three Million US Dollars (US$3,000,000.00); that the said Facility Loan Agreement was arranged by the Citibank, N.A. Manila Branch and Citicorp International Ltd. and is fully guaranteed by the Republic of the Philippines. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides, viz : "Article 11 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. . . . "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" Corollary to the above-quoted provision is Article 4 of the same treaty which provides that: "Article 4 "1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head or main office, place of incorporation or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein." (Emphasis Supplied) "xxx xxx xxx" It is clear from the aforequoted Article 4 that the term "resident of Japan" shall include any person who is liable to tax in Japan by reason of its place of head or main office or place of incorporation. In the instant case, it must be noted that IBJ Leasing Co., Ltd, of Japan, the main or head office of IBJ Cayman Office, is located and incorporated in Japan. Accordingly, IBJ Cayman Office is covered by the RP-Japan tax treaty and therefore entitled to the preferential tax rate of 15% on the interest payments it received from the loan obtained from it by PNOC, pursuant to Article 11(2)(b) of the RP-Japan tax treaty. (BIR Ruling No. ITAD 186-00) Moreover, the Facility Loan Agreement executed shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service