ITAD Ruling No. 140-04

November 30, 2004 ITAD RULING NO. 140-04 Article 11, Philippines-Japan tax treaty BIR Ruling No. 142-95 BIR Ruling No. DA-ITAD 47-04 Philippine HKR Inc. Toyota Industrial Complex Sta. Rosa, Laguna Attention: Mr. Ryuzo Miwa EVP/Treasurer Gentlemen : This refers to your application for tax treaty relief dated July 8, 2004, requesting for a 15% final withholding tax on interest payments made by Philippine HKR Inc. (HKR) to UFJ Bank Limited (UFJ) pursuant to the Philippines-Japan tax treaty. It is represented that UFJ is a corporation and existing under the laws of Japan with principal address at 21-24, Nishiki 3-chome, Naka-ku, Nagoya City, Japan; that UFJ has a branch office at 6 Raffles Quay, #24-01 John Hancock Tower, Singapore 048580; that it 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 July 26, 2004; that HKR is a Philippine Economic Zone Authority (PEZA)-registered enterprise per Certificate of Registration No. 96-111 dated October 24, 1996 with principal address at Toyota Industrial Complex, Sta. Rosa, Laguna; that on March 16, 2004, UFJ and HKR entered into a Loan Agreement whereby UFJ agreed to grant a term loan facility of Japanese Yen Two Hundred Million (JPY200,000,000) to HKR to be drawn in one lump sum on the borrowing date; that the rate of interest applicable on the loan shall be the rate determined by UFJ to be the aggregate of (1) 0.7% per annum and (2) UFJ's cost of funds and shall be applicable for the period commencing on the borrowing date and ending on the maturity date; and that HKR shall pay interest semi-annually, the first of such interest payment shall be made on the date falling six (6) Months from the borrowing date of the loan, and the final interest payment shall be made on the maturity date. In reply, please be informed that Article 11 of the Philippines-Japan 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 Contracting State. EaIcAS "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. "xxx xxx xxx." 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 15 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 debentures. Therefore, the interest paid by HKR to UFJ, who is the beneficial owner of such interest, shall be subject to tax at the preferential rate of fifteen percent (15%) based on the gross amount of the interest pursuant to Article 11 of the Philippines-Japan tax treaty. However, the Loan Agreement shall be subject to documentary stamp tax imposed under Section 179 of the 1997 Tax Code, as amended. (BIR Ruling No. 142-95 dated September 13, 1995 and BIR Ruling No. DA-ITAD 47-04 dated May 7, 2004) 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service