ITAD Ruling No. 112-00

August 28, 2000 ITAD RULING NO. 112-00 RP-Netherlands-Art. 11 00-00 Philips Semiconductors Phils., Inc. LIIP-EPZA, Bo. Diezmo, Cabuyao, Laguna Attention: Mr. Ayasamy Ramajillu Financial Controller and Vice President Gentlemen : This refers to your letter dated September 28, 1999 regarding the preferential tax rate of fifteen per cent (15%) currently being withheld by your company, PHILIPS SEMICONDUCTORS PHILIPPINES, INC. (PSPI), on your interest payments to KONINKLIJE PHILIPS ELECTRONICS N.V. (KPEN) under the Term Loan Agreement dated January 31, 1999 entered into by both companies. Relative thereto, you now ask for reconsideration requesting that a lower preferential tax rate of ten per cent (10%) be granted on the same interest payments, under the same Term Loan Agreement entered into by the said two (2) companies, on the ground that the loan is intended to finance the acquisition of new technology, citing as basis Article 11 of the RP-Netherlands Tax Treaty. In reply, please be informed that Article 11 of the RP-Netherlands Tax Treaty provides as follows: "Article 11 INTEREST "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such interest may also be taxed in the 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 if such interest is paid: (i) in connection with the sale of credit of any industrial, commercial or scientific equipment or HCSEcI (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) 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. xxx xxx xxx" It is clear from the said Article that, in order to qualify for the 10% tax rate, the interest is paid under any of the three conditions set forth therein. Although the loan is intended to finance a new technology, such basis alone cannot qualify under paragraph 2(a) of the aforementioned Article. A thorough evaluation of the Term Loan Agreement submitted shows no sale on credit of any industrial, commercial or scientific equipment, neither is the lender a financial institution, nor is the interest paid in respect of public issues of bonds, debentures or similar obligations. Considering that the interest payments made by PHILIPS SEMICONDUCTORS PHILIPPINES, INC. to KONINKLIJE PHILIPS ELECTRONICS N. V. cannot be categorized under any of the conditions set forth in paragraph 2(a), Article 11 of the RP-Netherlands Tax Treaty, your request for a 10% preferential tax rate is hereby denied. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group