ITAD Ruling No. 167-02

September 30, 2002 ITAD RULING NO. 167-02 Art. 11, RP-Japan BIR Ruling No. DA-ITAD-94-01 Joaquin Cunanan & Co. Unit 306, Keppel Center Samar Loop cor. Cardinal Rosales Ave. Cebu Business Park Attention: Victor O. Machacon Partner, Assurance & Business Advisory Services Gentlemen : This refers to your letter dated May 6, 2002 requesting for a fifteen per cent (15%) preferential tax rate on the interest payments of K.T. Sakurai Corporation (KTSC) to Kenko Corporation (Kenko) pursuant to Article 11(2)(b) of the RP-Japan tax treaty. It is represented that Kenko is a foreign corporation duly organized and existing by virtue of the laws of Japan with principal address at 9-19 Nishi Ochiai 3 Chome, Shinjuku-ku, Metropolitan Tokyo, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certification dated July 3, 2002 issued by the Securities and Exchange Commission; that KTSC is a domestic corporation duly organized and existing by virtue of the laws of the Philippines with business address at Mactan Processing Zone I, Lapu-Lapu City; and that on December 4, 2001, by virtue of the Financial Loan Contract, KTSC borrowed from Kenko the amount of 5,833,333 Yen payable every end of the month starting December, 2001 subject to 1.375% interest per annum. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides, viz : "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. . . . "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, this Office is of the opinion and so holds that the interest payments of KTSC to Kenko pursuant to the subject loan contract are subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. (BIR Ruling No. DA-ITAD-94-01 dated October 19, 2001) Moreover, the Financial Loan Contract executed by KTSC and Kenko is subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1977. cDHCAE This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be discovered 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