ITAD Ruling No. 133-04

November 16, 2004 ITAD RULING NO. 133-04 Article 11, Philippines-Japan Tax Treaty BIR Ruling No. DA-ITAD 112-02 Simian Conservation Breeding and Research Center, Inc. 6th Floor, Kings Court I 2129 Pasong Tamo, Makati City Attention: Takahiro Uematsu President Gentlemen : This refers to your application for tax treaty relief dated August 5, 2004, requesting confrontation of your opinion that the tax on the interest income earned on leans granted by LSG Corporation (LSG) to Simian Conservation Breeding & Research Center, Inc. (SCBRCI) is subject to 15% withholding tax pursuant to Article 11 of the Philippine-Japan tax treaty. It is represented that LSG is a nonresident foreign corporation organized and existing under the laws on Japan with principal address at S&S Bldg., 6-36, Shin-Ogawamachi, Shinjuku-ku, Tokyo, Japan; that is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 4, 2004; that SCBRCI is a corporation duly organized and existing under the laws of the Philippines with principal address at 6th Floor, Kings Court I, 2129 Pasong Tamo, Makati City, Philippines; that on February 3, 2003, LSG entered into a Memorandum of Agreement (Agreement) with SCBRCI under which it was provided that (1) on January 1, 2003, SCBRCI export sales transactions were made directly to KS International Pte. Ltd. (KSIP), an affiliate, based in Singapore, (2) that SCBRCI receives cash advances from KSIP which are paid and reduced by the amount of export sales to the latter, and (3) that KSIP's business operations including distribution and sale of bred monkeys coming from SCBRCI was assumed by LSG; and that pursuant to said Agreement, (1) SCBRCI's outstanding liability to KSIP representing balance of advances from an affiliate as of February 28, 2003, shall be transferred to LSG, (2) starting March 1, 2003, said balance of advances from affiliate plus the additional advances to SCBRCI shall be charged interest based on the American prime rate, (3) the amount of interest shall be computed on a daily basis, based on the principal amount composed of the monthly beginning balance, plus the amount of cash advance for the current month, minus the amount of export sales for the month to LSG, (4) the amount of interest, shall be added on cumulatively to the original principal amount, the total of which shall compose the beginning balance of the account for the subsequent month, and (5) SCBRICI shall manage and make a regular report to LSG on a monthly basis. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Articles 11 "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 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 "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 bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures." 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 fifteen percent (15%) of the gross amount of the interest provided the recipient is the beneficial owner of the interest and that said income was not generated from Government securities, bonds or debenture. Thus, the interest paid by SCBRCI to LSG, which is the beneficial owner thereof, shall be subject to tax at the rate of fifteen percent (15%), based on the gross amount thereof, pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. HcDATC However, the Memorandum of Agreement shall be subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. (BIR Ruling No. ITAD-112-02 dated May 31, 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 insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service