ITAD Ruling No. 122-00

August 29, 2000 ITAD RULING NO. 122-00 Article 11 RP-Japan BIR RULING 310-88 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Ms . Tomasa H . Lipana Managing Partner Tax Services Department Gentlemen : This refers to your letter dated November 15, 1999 requesting for a ruling to the effect that interest on the delayed payments on K & K Molding's (K & K) purchase of equipment from Kasei Industry Co., Ltd. (Kasei) shall be subject to the preferential tax treaty rate of 15% pursuant to RP-Japan Tax Treaty. It is represented that Kasei is a non-resident foreign corporation organized and existing under the laws of Japan; that it is not registered either as a corporation/partnership in the Philippines as per certification dated October 18, 1999 issued by the Securities and Exchange Commission; that K & K is a corporation organized and existing under the laws of the Philippines; that Kasei sold to K & K plastic molding equipment for the latter's plant at Lima Technology Center in Malvar Batangas; that the agreement provides that the purchase price of US$2,367,000 shall be payable without interest if paid on or before December 31, 1998; that K & K failed to pay the balance of US$1,739,405 out of US$2,367,000; that on December 9, 1998, the parties entered into another agreement entitled " Addendum to the Agreement for the Purchase of Equipment"; that under the Addendum, the parties agreed that the balance of US$1,739,405 shall be paid in equal quarterly installments in the amount of US$96,600 until the entire balance is paid; and that the Addendum further provides that the initial quarterly payments shall be subject to interest amounting to US$12,780.08 and; that the succeeding quarterly payments shall be subject to interest at US$13,071.76 per installment. In reply, please be informed that Article 11 of the RP-Japan Treaty provides as follows: "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 interest if the interest is paid in respect of Government Securities, or bonds or debentures; DAEIHT b) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx 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 bond or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx xxx xxx" Such being the case, the interest payments to be remitted to Kasei by K & K relative to delayed payments on K & K's purchase of equipment from Kasei is subject to a tax of 15% of the gross amount of interest imposed pursuant to Article 11 of the RP-Japan Tax Treaty. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be rendered null and void. Very truly yours, DAKILA B. FONACIER Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group