ITAD Ruling No. 173-00

November 14, 2000 ITAD RULING NO. 173-00 RP-Japan Article 11 ITAD 19-00 Tes Philippines Inc. Edsa MRT Depot North Avenue cor. Edsa Quezon City Attention: Tetsugo Kanemura, President Gentlemen : This refers to your letter dated 25 July 2000, applying for 15% tax treaty rate on interest based on the Loan Agreement entered into by your office with Ryoju Transportation Equipment Engineering & Service Ltd., Japan (RYOJU) pursuant to Article 11(1) & (2) of the RP-Japan Tax Treaties. It is represented that TES Philippines, Inc. (TES) is a corporation duly organized and existing under the laws of the Philippines with office address at EDSA MRT Depot, North Avenue corner EDSA, Quezon City; that it is organized for the purpose of maintaining Metro Rail Transit (MRT); that TES entered into a loan agreement with RYOJU to finance its working capital requirements; the RYOJU is a corporation organized and existing under the law of Japan with head office located at Kawasaki-ku, Kawasaki, Kinagawa Prefecture, Japan; that according to the loan agreement entered into by TES and RYOJU, the latter grants to the former a loan amounting to JPY70,000,000 on August 25, 1999 and JPY370,000,000 on October 25, 1999, and that the interest will be 2.35% per year net of withholding tax which payment date shall be the same date as that of the principal. 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 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. 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." Based on the foregoing, interest arising in the Philippines and paid to a resident of Japan may be subject to Philippine tax at the rate not to exceed 15 per cent (15%) of the gross amount of the interest, if the recipient is the beneficial owner of the interest and that the said income was not generated from Government Securities, bonds or debentures. Therefore, the interest paid by TES to RYOJU who is the beneficial owner thereof, shall be subject to a 15 per cent (15%) of the gross amount of the interest pursuant to the RP-Japan Tax Treaty. However, this Agreement shall be subjected to documentary stamp tax pursuant to Section 180 of the 1997 Tax Code. (ITAD 19-00) This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. DHcTaE Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group