ITAD Ruling No. 178-03

November 24, 2003 ITAD RULING NO. 178-03 RP-Austria, Article 11 BIR Ruling No. ITAD 151-03 TANN Philippines, Inc. First Philippine Industrial Park Brgy. Sta. Anastacia, Sto. Tomas Batangas, Philippines Attention: Mr. Lukas Jungreithmeir President Gentlemen : This refers to your tax treaty relief application dated October 15, 2003, requesting confirmation of your opinion that the interest payments by Tann Philippines, Inc. (TPI) to Tann Papier Gesellschaft mbH (Tann-Papier) and Trierenberg Velwaltungs Aktiengesselschaft (TB VwAG) are subject to the preferential tax rate of 15% pursuant to the RP-Austria tax treaty. It is represented that Tann-Papier and TB VwAG are corporations organized and existing under the laws of Austria, both with business address at Fabrikstrasse 20 A-4050 Traun, Austria; that Tann-Papier and TB VwAG are not registered either as corporations or as partnerships licensed to do business in the Philippines per certificate issued by the Securities and Exchange Commission dated July 8, 2003 and September 15, 2003, respectively; that TPI is a corporation organized and existing under the laws of the Philippines with business address at First Philippines Industrial Park, Brgy. Sta. Anastacia, Sto. Tomas, Batangas and registered with the Philippine Economic Zone Authority (PEZA) as an Export Enterprise; that on May 8, 2002, TPI entered into a loan agreement with TB VwAG whereby the latter extended a loan in the amount of Three Million Euros, (EUR3,000,000.00) with interest at a rate initially fixed at the EURIBOR-rate of July 1st, 2002, plus 50 basis points to be paid beginning on June 30, 2003; that Tann-Papier likewise agreed to extend a loan to TPI with a maximum credit amount of Two Million Two Hundred Thousand Euros (EUR2,200,000.00) as shown in the certified electronic mail correspondence sent by Tann-Papier on March 27, 2003; that as of 2002, TPI already availed EUR742,162.00 for which TPI was charged with the corresponding interest in the amount of EUR1,918.90. In reply, please be informed that Article 11 of the RP-Austria tax treaty provides as follows: "Article 11 "Interest "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: HSEIAT a) 10 per cent of the gross amount of the interest if the interest is paid by a resident of the Philippines to a resident of Austria in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of the interest in all other cases. "3. Notwithstanding the provisions of paragraph 2, the amount 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 Austria, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. "xxx xxx xxx. 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; and in all other cases, fifteen percent (15%) of the gross amount of the interest. Such being the case, and since TANN-Papier and TB VwAG are residents of Austria and the beneficial owners of the interest, this office hereby confirms your opinion that the interest payments by TPI to Tann-Papier and TB VwAG are subject to the preferential tax rate of fifteen percent (15%) of the gross amount of the interest, pursuant to the RP-Austria tax treaty. ( BIR Ruling No. DA-ITAD 151-03 dated October 8, 2003 ). Moreover, the Loan Agreements executed by TPI with Tann-Papier and TB VwAG shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 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 herein parties are concerned. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service