ITAD Ruling No. 186-00

December 7, 2000 ITAD RULING NO. 186-00 RP-Japan Article 11, Article 4 BIR Ruling 142-95 ITAD Ruling 30-00 Philippine National Oil Company PNOC Building VI, Energy Center Merritt Road, Fort Bonifacio Taguig, Metro Manila Attention: Bernadette B . Jugan Manager, Legal Department This refers to your letter dated June 15, 2000 requesting confirmation of your opinion that the interest paid on loan secured by PHILIPPINE NATIONAL OIL COMPANY (PNOC) from TOKAI BANK LIMITED, SINGAPORE (TOKAI SINGAPORE) is subject to a 15% preferential tax treaty rate pursuant to the RP-Japan Tax Treaty. It is represented that TOKAI SINGAPORE is an offshore bank of the Tokai Bank Limited of Japan, existing and organized under the laws of Japan, with address at 21-24, Nisiki 3-Chrome, Naka-ku, Nagoya, Japan and its Singapore office is located at 80 Raffles Place, #1061 UBC Plaza I, Singapore; that per certification dated June 14, 2000 issued by the Securities and Exchange Commission (SEC), TOKAI SINGAPORE: was duly licensed to establish a regional office in the Philippines on March 26, 1982; that it does not have a permanent establishment in the Philippines within the meaning of "permanent establishment" under Article 5 of the RP-Japan Tax Treaty; that PNOC is a government owned and controlled corporation established by virtue of Presidential Decree No. 334 (as amended) of the Republic of the Philippines with business address at PNOC Building VI, Energy Center, Merritt Road, Fort Bonifacio, Taguig, Metro Manila; that on March 27, 2000, a US$130,000,000.00 loan facility was made available to PNOC as borrower by a group of banks on whose behalf Citibank, N.A. Manila Branch acted as an agent; that one of the banks is TOKAI SINGAPORE which has a participation of US$12,000,000.00 with an interest rate on such loan as stated on the Facility Agreement. In reply thereto, please be informed that Article 11 of the RP-Japan Tax Treaty states that: "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 law 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; EcDTIH b) 15 per cent of the gross amount of such interest in all other cases. "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 or prizes attaching to such securities, bonds or debentures. "xxx xxx xxx" Corollary to the above-quoted provision is Article 4 of the same treaty which provides that: "Article 4 "(1) For the purposes of this Convention the term "resident of a Contracting State" means any person who, under the laws of that Contracting State is liable to tax therein by reason of his domicile residence place of head or main office, place of incorporation or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein." (Emphasis supplied) It is a clear from the aforequoted provision that the term "resident of Japan" shall include any person who is liable to tax in Japan by reason of its place of head or main office or place or incorporation. In which case, the preferential tax rate under the RP-Japan tax treaty, which is 10 per cent of the gross amount of interest if the interest is paid in respect of government securities or bonds, or debentures, and 15 per cent of the gross amount of such interest in all other cases, when the recipient of the interest is the beneficial owner thereof, shall be applied. DICSaH In the instant case, TOKAI SINGAPORE is a branch of Tokai Bank Limited of Japan which main or head office is in Japan, thus, entitled to avail of the preferential tax rates under the RP-Japan Tax Treaty. Accordingly, the applicable rate on the interest payment on the loan obtained by PNOC from TOKAI SINGAPORE is 15% since TOKAI SINGAPORE is the recipient and also the beneficial owner of such interest and considering further that the interest income was not generated from government securities, bonds or debentures. (BIR Ruling 142-95; ITAD Ruling 30-00) Further, the loan agreement executed by and between them shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. This ruling is being 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group