ITAD Ruling No. 161-00

October 23, 2000 ITAD RULING NO. 161-00 Article 11 RP-Japan ITAD 5-99 Kito Philippines, Inc. 128 North Science Avenue Extension Special Economic Processing Zone Laguna Technopark, Bian, Laguna Attention: Mr . Nobuyuki Watanabe VP-General Manager Gentlemen : This refers to your letter dated July 16, 1999 applying for tax treaty relief on the loan of Kito Philippines, Inc. (Kito Phils.) in the amount of Japanese Yen Two Hundred Seventy Nine Million Three Hundred Twenty One Thousand Five Hundred Seventy-Five (JPY279,321,575) with its mother company, Kito Corporation (Kito Corp.) under the RP-Japan Tax Treaty. It is represented that Kito Corp. is a non-resident foreign corporation organized and existing under and by virtue of the laws of Japan with business address at 2000 Tsuiji-arai, Showa-cho, Nakakoma-gun, Yamanshi, Japan; that it is not registered as a corporation or a partnership in the Philippines as per certification issued by the Securities and Exchange Commission dated June 14, 1999; that Kito Corp. is the mother company of Kito Phils., a company duly incorporated under the laws of the Philippines and having an office at Laguna Technopark, Bian, Laguna, Philippines; that Kito Phils. Inc. is a PEZA-registered Ecozone Enterprise with Registration Certificate No. 96-062; that Kito Corp. and Kito Phils. entered into a Loan Agreement dated October 17, 1997 covering a loan in the amount of Japanese Yen Two Hundred Seventy Nine Million Three Hundred Twenty One Thousand Five Hundred Seventy-Five (JPY279,321,575) with an interest rate of 1.92% per annum payable annually; that the loan was used to offset Kito Phils.' payables from Kito Corp. for the machinery, tools and supplementary for production. 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 the 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 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. HSaCcE "3. . . . "4. . . . "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" Such being the case, interest payments to be made by Kito Phils. to Kito Corp. shall be subject to 15% income tax based on the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan Tax Treaty. In addition, said payments shall be subject to documentary stamp tax under Section 180 of the National Internal Revenue Code of 1997. This ruling is 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. DHcTaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group