ITAD Ruling No. 126-03

August 18, 2003 ITAD RULING NO. 126-03 Protocol Amending the RP-Belgium Tax Treaty BIR Ruling No. DA-ITAD 60-02 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law Office Sycip Law-All Asia Capital center 105 Paseo de Roxas, Makati City 1226 Metro Manila Attention: Atty. Hector M. de Leon, Jr. Atty. Benedicto P Panigbatan Gentlemen : This refers to your letter dated July 22, 2003 for the issuance of a supplemental ruling in relation to BIR Ruling No. DA-ITAD 099-03 requesting further that the ten percent (10%) preferential tax rate provided under the Protocol Amending the Agreement between the Republic of the Philippines and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income be applied to the interest payments made by CBK to Fortis pursuant to their Omnibus Credit and Security Agreement. It is represented that CBK Power Company Limited (CBK) is a limited partnership duly organized and existing under and by virtue of the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) under Company Registration No. A200004027 dated October 9, 2001, with business address at 29th Floor, LKG Tower, 6801 Ayala Avenue, Makati City; that Fortis is a financing institution domiciled in Belgium as evidenced by the Tax Residence Certificate issued by the tax authorities of the Kingdom of Belgium; that Fortis' participation as lender was assigned to it by Fortis (Nederland) pursuant to their Assignment and Assumption Agreement executed on October 1, 2001 relative to the Omnibus Credit and Security Agreement. In reply, please be informed of Article IV of the Protocol Amending the RP-Belgium tax treaty, to wit: "Article IV "Article 11 of the Agreement is substituted with the following: "Article 11 "Interest "1. Interest arising on a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. "3. . . . "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, as well as income assimilated to or taxed in the same way as income from money lent by the taxation law of the State in which the income arises, including interest on deferred payments. However, the term 'interest' shall not include for the purpose of this Article interest regarded as dividends under paragraph 3 of Article 10. "xxx xxx xxx." Based on the above-quoted provisions, the interest payments will be taxed at a preferential rate of not exceeding ten percent (10%) of the amount of the interest if the beneficial owner is a resident of Belgium. Such being the case, and since Fortis is a resident of Belgium and the beneficial owner of the interest, this Office is of the opinion and so holds that the interest payment to Fortis by CBK pursuant to their Omnibus Credit and Security Agreement is subject to a preferential rate of ten per cent (10%) pursuant to the Protocol Amending the RP-Belgium tax treaty which provisions apply on income derived or which accrued beginning January 1, 2000, thereby modifying BIR Ruling No. DA-ITAD 099-03 insofar as the declarations therein are inconsistent herewith. (BIR Ruling No. DA-ITAD 60-02 dated April 24, 2002) 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 it solar as herein parties are concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service