ITAD Ruling No. 122-03

August 11, 2003 ITAD RULING NO. 122-03 Art 11, RP-Japan tax treaty BIR Ruling No. DA-ITAD-68-03 Sycip Gorres Velayo & Co. 2F Blk. A. Mactan Marina Mall Pusok, Lapu-Lapu City 6015 Cebu Attention: Ms. Lauris L. dela Pea Tax and Business Advisory Gentlemen : This refers to your application for tax treaty relief dated May 2, 2003, on behalf of your client, UBE Electronics (Philippines) Inc., (UBE Phil), requesting confirmation of your opinion that the interest payments of UBE Phil to UBE Electronics Ltd of Japan (UBE Japan) are subject to 15% preferential withholding tax rate pursuant to the RP-Japan tax treaty. It is represented that UBE Japan is a corporation organized and existing under the laws of Japan with principal address at 2023-2 Aza-Mugigawa, Ohmine-cho, Mine City, Yamaguchi pref., Japan; that it is not registered either as a corporation or a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 1, 2003; that UBE Phil is a corporation duly organized and existing under the laws of the Philippines and registered with the Philippine Economic. Zone Authority (PEZA) with principal address at Mactan Export Processing Zone II, Basak, Lapu-lapu City, Cebu; that on March 24, 2003, UBE Phil and UBE Japan entered into a loan agreement in the amount of Three Million Four Hundred Thirty Three Thousand Five Hundred Twenty-One and 56/100 US Dollars (US$3,433,521.56); that all sums, principal and interest, payable to UBE Japan shall be paid in US Dollars through Accounts Receivable Offsetting, or as may be specified by UBE Japan. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides as follows: "Article 11 "Interest I "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contacting 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; xxx xxx xxx "4. 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" Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at a 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 the interest is not generated from Government securities, bonds or debentures. Therefore, the interest paid by UBE Phil to UBE Japan, which is the beneficial owner thereof, shall be subject to fifteen per cent (15%) of the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. Moreover, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 180 of the 1997 Tax Code. ( BIR ruling No. ITAD 63-03 dated May 5, 2003 ) 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service