ITAD Ruling No. 138-00

September 19, 2000 ITAD RULING NO. 138-00 RP-Malaysia Art. 11 (2) 142-95 029-99 Joaquin Cunanan & Co . 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . Tomasa H . Lipana Managing Partner Gentlemen : This refers to your letter dated February 6, 2000, re-applying for the availment of the preferential tax rate of 15% to be withheld from the interest payments and remittances of your client, Integrated Device Technology (Phils.), Inc. ( IDT-Philippines ) to Integrated Device Technology, Inc. Malaysia Sdn ( IDT-Malaysia ) pursuant to Article 11 (2) of the RP- Malaysia Tax Treaty. It is represented that IDT-Philippines is a domestic corporation organized and existing under the laws of the Philippines with business address at Carmelray Industrial Park, Canlubang, Laguna; that IDT-Malaysia is a non-resident foreign corporation organized and existing under the laws of Malaysia with address at Phase 3, Bayan Lepus Free Industrial Zone, 11900 Penang, Malaysia; that it is not licensed to do business in the Philippines as evidenced by a Certification of Non-registration issued by Securities and Exchange Commission dated December 20, 1999; that as of October 31, 1998, IDT-Philippines had obtained loans from IDT-Malaysia in the aggregate amount of Nine Million Four Hundred Eighty Four Thousand U.S. Dollars ( US$9,484,000 . 00 ); that it obtained additional loans in the succeeding months thus increasing the loan to Fifteen Million Nine Hundred Eighty Four Thousand U.S. Dollars ( US$15,984,000 . 00 ); that the loans are covered by promissory notes each of which has a term of one year with repayment to commence on April 2, 1999; and that some of these loans were in turn amended/replaced by succeeding promissory notes extending the period of repayment and increasing the amount of interest to be paid. In reply, please be informed that Article 11 (2) of the RP-Malaysia Tax Treaty provides as follows: "Article 11 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 laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of interest. xxx xxx xxx 6. The term "interest as used in this Article means income from Government securities bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits and debt-claims of every kind as well as all other income assimilated to income from money lent according to the taxation laws of the Contracting state in which the income arises." Considering that the recipient, IDT-Malaysia , is the beneficial owner of interest arising in the Philippines, the interest payments made by IDT-Philippines are subject to the Philippine tax at the rate of 15% of the gross amount of interest. However, the Loan Agreement executed by and between them shall be subjected to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. (BIR Rulings 142-95 & 029-99). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group