ITAD Ruling No. 112-02

May 31, 2002 ITAD RULING NO. 112-02 RP-Japan Article 11 ITAD 173-00 TES Philippines, Inc. Edsa MRT Depot North Avenue cor. Edsa Quezon City Attention: Tetsugo Kanemura President Gentlemen : This refers to your letter dated 20 November 2000, applying for 15% tax treaty rate on the interest income derived from the Loan Agreement entered into by your office with Ryoju Transportation Equipment Engineering & Service Ltd., Japan (RYOJU) pursuant to Article 11, paragraphs (1) and (2) of the RP-Japan tax treaty. It is represented that TES Philippines, Inc. (TES) is a corporation duly organized and existing under the laws of the Philippines with office address at EDSA MRT Depot, North Avenue corner EDSA, Quezon City; that it is organized for the purpose of maintaining the Metro Rail Transit (MRT); that TES entered into a loan agreement with RYOJU to finance its working capital requirements; that RYOJU is a corporation organized and existing under the laws of Japan with head office located at Kawasaki-ku, Kawasaki, Kinagawa Prefecture, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated November 5, 2001 issued by the Securities and Exchange Commission (SEC); that under the loan agreement, RYOJU granted TES a loan amounting to JPY 30,000,000 on June 21, 1999 and that the interest will be at 1.75%, per year net of withholding tax which payment date shall be the same date as that of the principal. In reply, please be informed that Article 11 of the 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 "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." Based on the foregoing, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at the rate not to exceed 15 per cent (15%) of the gross amount of the interest, if the recipient is the beneficial owner of the interest and that said income was not generated from Government Securities, bonds or debentures. Therefore, the interest paid by TES to RYOJU, who is the beneficial owner thereof, shall be subject to 15 per cent (15%) of the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. However, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 180 of the 1997 Tax Code. (ITAD 173-00 dated November 14, 2000) This ruling is issued based on the foregoing 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