ITAD Ruling No. 109-01

October 30, 2001 ITAD RULING NO. 109-01 Article 12, RP-Thailand BIR Ruling No. ITAD-26-2000 United Pulp and Paper Co. Inc. Phinma Building 5th Floor 166 Salcedo St., 1229 Makati City Attention: Mr. Florentino S. Jumaquio Vice-President Finance Gentlemen : This refers to your application for relief from double taxation dated September 28, 2000, requesting that the interest and income participation payments of United Pulp and Paper Co. Inc. (United Pulp) to Siam and Pulp and Paper Public Co. Ltd (SPPC) be exempted from Philippine income tax pursuant to Article 12(1) of the RP-Thailand Tax Treaty. It is represented that SPPC is a non-resident foreign corporation organized and existing under the laws of Thailand with principal address at No. 1 Siam Cement Road, Bangsue Bangkok, Thailand; that it 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 August 28, 2000 issued by the Securities and Exchange Commission; that United Pulp is a corporation organized and existing under the laws of the Philippines with principal address at 5 th Floor Phinma Bldg., 166 Salcedo St., 1229 Makati City; that United Pulp is a BOI-registered corporation per BOI Certificate of Registration No. DP-97-164 dated July 22, 1997, as an expanding domestic producer of paper products (Linerboard and Corrugating Medium) as of August 4, 1997, on a non-pioneer status under the Omnibus Investment Code of 1997 (E.O. 226); that SPPC is a bonafide stockholder of United Pulp with shareholdings of 34,455,107 common shares at P10.00 par value, representing 37.36% of United Pulp's total shareholdings; that by virtue of a Subordinated Loan Agreement (SLA) made by and between SPPC and United Pulp dated May 18, 1999, SPPC agreed to lend United Pulp the amount of US$3,750,000.00 payable on April 30, 2009; that United Pulp shall pay a base interest at the Base Interest Rate as determined in, and in accordance with, the SLA; that in addition to the base interest, United Pulp shall pay SPPC an income participation amount likewise as determined in, and in accordance with, the SLA; that in case United Pulp failed to pay any of the principal amount of the loan, the base interest, or the income participation, United Pulp shall pay an additional interest at the rate of 2% per annum in respect of the amount due and unpaid; and that the principal amount of the loan, all income participation, and all interest thereon, shall be subordinate and junior in right of payment to the prior payment in full of other loans (as stated in the SLA) when due (whether at stated maturity, upon acceleration or otherwise). In reply, please be informed that Article 12 of the RP-Thailand Tax Treaty provides as follows; to wit: "Article 12 "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 laws of that 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 interest if: (i) it arises in Thailand and is received by Philippine financial institutions (including insurance companies) (ii) it arises in the Philippines in respect of public issues of bonds, debentures or similar obligations; b) 15 per cent of the gross amount of interest if it arises in the Philippines, and c) 25 per cent of the gross amount of interest if it arises in Thailand. "3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. xxx xxx xxx." Interest is generally taken to mean remuneration on money lent being remuneration coming within the category of income from movable capital. The term designates in general, income from debt claims of any kind, whether or not secured by mortgage and whether or not carrying rights to participate in profits. Such being the case, the interest income and income participation to be remitted by SPPC to United Pulp relative to the aforementioned loan shall be subject to the preferential tax rate of 15% Philippine income tax based on the gross amount of the interest, pursuant to Article 12 of the RP-Thailand Tax Treaty contrary to your opinion that the same is exempted. (BIR Ruling No. ITAD-26-2000) Moreover, Section 180 of the National Internal Revenue Code (Tax Code) of 1997 provides, viz : "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 of 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 part, 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 said transaction must be paid and the corresponding return thereon be filed by either United Pulp or SPPC in accordance with the provisions of the Tax Code of 1997. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, 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