ITAD Ruling No. 128-04

November 10, 2004 ITAD RULING NO. 128-04 Article 11, Philippines-Spain tax treaty BIR Ruling No. DA-ITAD 92-03 Constantino V. Rodel Attorney and Counselor at Law 33rd Floor, Export Bank Plaza Chino Roces corner Gil Puyat Avenues Makati City Gentlemen : This refers to your letter dated September 8, 2004 applying for relief from double taxation on behalf of your client, Greif Spain Holdings, SL (Greif Spain) on its interest income received from Greif Philippines, Inc. (Greif Phils), pursuant to Article 11 of the Philippines-Spain tax treaty. It is represented that Greif Spain is a nonresident foreign corporation duly organized and existing under the laws of Spain, with principal office at 28, 3 Ibanez de Bilbao, Bilbao; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certificate of Non-Registration dated May 5, 2004 issued by the Securities and Exchange Commission; that Greif Phils, formerly Van Leer Philippines, Inc., is a domestic corporation organized and existing under the laws of the Philippines with principal address at PSPC Refinery Compound, Brgy. Malaya, Pililla, Rizal; that Greif Phils is registered with the Board of Investments (BOI) under Certificate of Registration No. EP 96-120 dated July 12, 1996; that Greif Phils borrowed funds from Greif Spain in the amount of US Dollars: One Million Six Hundred Thousand (US$1,600,000.00); that Greif Spain is not a shareholder of Greif Phils and no shares of stock of Greif Phils is registered in the name of Greif Spain as of the date of loan transaction between Greif Phils and Greif Spain per certification dated September 20, 2004 issued the Corporate Secretary of Greif Phils; that Greif Phils executed a Promissory Note (Note) in the amount of US$1,600,000.00 in favor of Greif Spain effective October 14, 2003; that pursuant to the said Note, Greif Phils promised to pay to Greif Spain, through its Zurich Branch or its assignee or to the legal holder thereof, the amount of the Note; that the unpaid balances will bear interest at a rate per annum equal to 3 month LIBOR USD plus a margin of three basis point (3%) until the principal is paid in full. TaCDAH In reply, please be informed that Article 10 of the Philippines-Spain tax treaty provides as follows: "Article 11 "INTEREST "1. Interest arising in 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 be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: "a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) in respect of issues of bonds, debentures or similar obligations offered to the general public. "b) 15 per cent of the gross amount of such 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 bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xx xxx xxx" Based on the abovequoted provisions, interest payments by a Philippine resident to a resident of Spain, who is the beneficial owner of the interest will be taxed at a preferential rate not to exceed 10 percent (10%) if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or in respect of issues of bonds, debentures or similar obligations offered to the general public. In all other cases, a preferential tax rate not to exceed 15 percent (15%), based on the gross amount of interest, shall apply. Such being the case, the interest payments to be remitted by Greif Phils to Greif Spain relative to the subject promissory note issued shall be subject to the preferential rate of 15% Philippine income tax, based on the gross amount of interest, pursuant to Article 11 of the Philippines-Spain tax treaty. (BIR Ruling No. ITAD-92-03 dated July 3, 2003) This ruling is issued based on 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