ITAD Ruling No. 123-02

July 17, 2002 ITAD RULING NO. 123-02 Articles 12, RP-Netherlands Tax Treaty BIR Ruling No. 001-99 Punongbayan & Araullo Ernst & Young International 20th Floor, Tower 1 6766 Ayala Avenue, 1200 Makati City Attention: Vic C. Mamalateo Tax Partner Gentlemen : This refers to your application for relief from double taxation dated April 7, 2000, on behalf of your client, SBC WARBURG DILLON READ SECURITIES PHILIPPINES (Warburg), requesting confirmation of your opinion that its interest payments to SBC INTERNATIONAL HOLDINGS B.V. (SBC) [presently, UBS INTERNATIONAL HOLDINGS B.V. (UBS)], are subject to the preferential tax rate of 15%, pursuant to Article 11 of the RP-Netherlands tax treaty. It is represented that Warburg is a corporation organized and existing under the laws of the Philippines and is duly licensed as a broker dealer; that it has its office address at 19th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati City; that SBC is a corporation organized and existing under the laws of Netherlands with office address at Herengracht 564 1017 CH Amsterdam, Netherlands; that, as indicated in SBC's Articles of Incorporation, its present name is UBS; that the purposes for which SBC is organized are as follows: to participate in, to take an interest in any other way in, to conduct the management of and to finance other business enterprises of whatever nature, to take up and to make loans and to provide securities for the debt of others, and to guarantee liabilities of third parties, together with all activities which are incidental to or which may be conducive to any of the foregoing; that neither SBC nor UBS is registered as a corporation or as a partnership and has not been licensed to do business in the Philippines, as per certifications dated March 2, 2000 and May 10, 2000, respectively, issued by the Securities and Exchange Commission; that Warburg entered into a Subordinated Loan Agreement (SLA) dated March 9, 1998 with SBC wherein SBC will lend Warburg the amount of P30,000,000, subject to 14.50% interest rate for the period of March 8, 1999 to March 8, 2000 and 12.50% for the period of March 8, 2000 to March 8, 2001; that the SLA was considered a satisfactory subordination agreement pursuant to Rule 24(a)-2 of the Revised Securities Act (RSA) as approved by the President of the Philippine Stock Exchange; that the said amount, including the interest thereon, shall be payable on March 8, 2000 and the balance, if any, on March 8, 2001; that the said dates are the scheduled dates of the obligation pursuant to the Amendment of the Subordinated Loan Agreement; that UBS owns 119,999,995 shares of the 120,000,000 issued and outstanding shares of Warburg. Under the terms and conditions of the Agreement, the cash proceeds shall be used and dealt with by Warburg as part of its capital, shall be subject to the risks of the business, and may be deposited in an account under its own name in any bank. Furthermore, SBC agrees that the obligation of Warburg with respect to the payment of principal and interest are subordinate in right of payment and subject to the prior payment in full of all claims of all other present and future creditors of Warburg arising out of any matter occurring prior to the date on which the obligation matures, except for claims which are subject of subordinating agreements which are of the same priority as, or are junior to the claim of, SBC under such subordinated agreements. In reply, please be informed that Article 11 of the RP-Netherlands tax treaty provides as follows, to wit: "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 on credit of any industrial, commercial or scientific equipment, or (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 cases. "xxx xxx xxx." "5. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt claims of every kind as well as other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose 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 every kind, whether or not secured by mortgage. The term "debt claims of every kind," obviously embraces cash deposits and security in the form of money, as well as government securities, and bonds and debentures, although the latter three are specially mentioned because of their importance and certain peculiarities that they may present. (OECD Model Tax Convention) As can be gleaned from the foregoing, Warburg's interest payments to SBC (now UBS) do not fall under the instances enumerated in Article 11 paragraph 2(a) which is subject to the withholding tax rate of 10% since the interests to be paid by Warburg are not in connection with any sale on credit of machineries and equipment or in respect of public issues of bonds, debentures or similar obligations. Furthermore, SBC is not a banking institution, and neither has it been established that SBC is a financial institution. Such being the case, its interest payments to SBC are subject to the withholding tax rate of 15% pursuant to paragraph 2(b) of the said Article. ( BIR Ruling No. 001-99 ) Moreover, the SLA executed by and between them shall be subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is issued based on the foregoing facts as represented. If upon investigation it shall be disclosed that the said 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