ITAD Ruling No. 188-00

December 7, 2000 ITAD RULING NO. 188-00 RP-Japan Article 11 BIR Ruling No. ITAD 16-00 Luzon Electronics Technology, Inc. Special Export Processing Zone, Gateway Business Park, Javalera, Gen. Trias, Cavite Attention: Mr . Junichi Kawaguchi Assistant Comptroller Gentlemen : This refers to your letter dated March 23, 2000, on behalf of HITACHI METALS, LTD. (HITACHI), requesting for a preferential tax treaty rate of ten percent (10%) to be withheld on interest payments to LUZON ELECTRONICS TECHNOLOGY, INC. (LETI), pursuant to the RP-Japan Tax Treaty. TESDcA It is represented that HITACHI is a corporation duly organized and existing under the laws of Japan, with principal office at 1-2, 2-Chome. Marunouchi, Chiyoda-Ku, Tokyo 105-8614, Japan; that it is not registered as a corporation or partnership in the Philippines as per certification issued by the Securities and Exchange Commission dated August 25, 1999; that LETI is a domestic corporation duly organized and existing under the laws of the Philippines and duly registered with the Philippine Economic Zone Authority with Certificate of Registration No. 95-121 dated November 14, 1995; and that the following Loan Agreements were entered into by and between HITACHI and LETI: LOAN 1 entered into on October 25, 1999, for the amount of One Billion Japanese Yen (1,000,000,000.00) with an interest rate of zero decimal point four two five percent (0.425 %); LOAN 2 entered into on December 21, 1999, for the amount of One Hundred Seventy Million Japanese Yen (170,000,000.00) with an interest rate of zero decimal point four two five percent (0.425%); and LOAN 3 entered into on February 25, 2000, for the amount of Four Hundred and Fifty Million Japanese Yen (450,000,000.00) with an interest rate of one decimal point seven zero three percent (1.703%). 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 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; cADSCT 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 incentive 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" Considering that LETI is not a Board of Investments (BOI) registered enterprise engaged in preferred pioneer areas of investment and since the interest paid is not in respect of Government securities, or bonds or debentures, your application for a preferential tax rate of ten per cent (10%) on the gross amount of interest paid to HITACHI is hereby denied. Nevertheless, pursuant to Article 11(2)(b) of the aforesaid tax treaty, the interest to be remitted by LETI to HITACHI relative to the aforementioned Loan Agreements shall be subject to a final tax rate of 15% of the gross amount of interest. In addition, the Loan Agreements shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code. 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 rendered null and void. cEHSTC Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group