ITAD Ruling No. 151-03

October 8, 2003 ITAD RULING NO. 151-03 RP-Japan, Article 11 BIR Ruling No. ITAD 21-99 Shindengen Philippine Corporation 120 Excellence Avenue cor Quality Drive Carmelray Industrial Park I, Canlubang Calamba, Laguna Attention: Mr. Gregorio L. Viado Finance Manager S i r : This refers to your tax treaty relief application dated July 29 2003, requesting confirmation of your opinion that the interest payments by Shindengen Philippines Corporation (SPC) to Export-Import Bank of Japan, (Eximbank) shall be exempt from Philippine income tax pursuant to the RP-Japan tax treaty. It is represented that Eximbank is a government financial institution wholly owned by the Japanese Government with address at 4-1 Ohtemachi 1-Chome, Chiyoda-Ku, Tokyo 100 Japan; that Eximbank is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certificate issued by the Securities and Exchange Commission dated July 25, 2003; that SPC is a corporation organized and existing under the laws of the Philippines with business address at Lots 20-22 Special Export Processing Zone, Carmelray, Industrial Park, Canlubang, Calamba, Laguna; that on May 16, 1996, SPC and Eximbank entered into a loan agreement whereby Eximbank agreed to make available to SPC a loan facility in an aggregate amount not exceeding Six Million U.S. dollars (US$6,000,000) for the sole purpose of financing the expenditures directly necessary for the implementation of the project having the objective of manufacturing electric parts, electric equipment and components; and that the facility loan and interest thereof shall be paid in accordance with the Amortization Schedule provided for in the loan agreement. In reply, please be informed that Article 11 of the RP-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. 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. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 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, the interest payments will be taxed at a preferential tax rate of not exceeding ten percent (10%) if the interest is paid in respect of government securities, or bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines; furthermore, paragraph 4 of the above provisions also provides for tax exemption on interest income derived by a financial institution wholly owned by the Government of Japan and interest income that are derived by a resident of Japan with respect to debt-claims guaranteed or indirectly financed by the government; and in all other cases, fifteen per cent (15%) of the gross amount of the interest. ACcEHI Such being the case, this office hereby confirms your opinion that the interest payments by SPC to Eximbank, Eximbank being a financial institution wholly owned by the Government of Japan, shall be exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 21-99 dated August 24, 1999). Moreover, the Loan Agreement executed by and between SPS and Eximbank shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. ( BIR Ruling No. ITAD 128-00 ). 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 parties herein are concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service