ITAD Ruling No. 192-02

October 29, 2002 ITAD RULING NO. 192-02 RP-Japan, Article 5, 7 & 11 BIR Ruling No. 175-85; 26-00 Sycip Gorres Velayo & Co. 3rd Floor Insular Life Bldg. Cor Gorordo and Gen. Maxilom Avenues Cebu City Attention: Mr. Rita Asuncion S. Fernandez Tax Division Gentlemen : This refers to your tax treaty application dated January 31, 2001 on behalf of your client Taiyo Yuden (Philippines), Inc. (Taiyo Yuden Phils), requesting confirmation of your opinion that the interest payment to be made by Taiyo Yuden Phils to Taiyo Yuden Co., Ltd. (Taiyo Yuden Japan) is subject to the preferential tax rate of 15% pursuant to Article 11(2)(b) of the RP-Japan tax treaty. It is represented that Taiyo Yuden Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at Matsumura Bldg. 16-20 Ueno 6-Chome Taito-ku, Tokyo, Japan; that it is registered and licensed to establish a representative office in the Philippines as evidenced by a certificate issued by the Securities and Exchange Commission dated December 5, 1997; that the said representative office undertakes the following activities: a) to act as a liaison office and deal directly with clients; b) to undertake information dissemination and promotion of the company's products; c) to study and investigate export feasibility d) to cope with customer' complaints and coordinate after sales service e) to coordinate warranty claims; f) to conduct market research for its production and market expansion; and g) to act as a communication link between clients and the company's head office. that the foregoing enumerates the only activities allowed by the SEC which the representative office can do under its license; that the representative office is not allowed to participate in any manner in the management of any subsidiary or branch that Taiyo Yuden Japan might have in the Philippines nor it is allowed to derive any income from sources within the Philippines; that the representative office acts exclusively for information collection and dissemination on behalf of Taiyo Yuden Japan and for other activities which are preparatory and auxiliary in character; that Taiyo Yuden Phils is a corporation duly organized and existing under the laws of the Philippines, with office address at Mactan Economic Zone, Lapu-Lapu City, Cebu; that Taiyo Yuden Japan owns ninety nine percent (99%) of the outstanding capital stock of Taiyo Yuden Phils representing Forty Eight Thousand Nine Hundred Eighty Two (48,982) common shares with par value at P10,000 per share; that on August 23, 2000, a Working Capital Loan Contract of Agreement (WC-CLA) was entered into by and between Taiyo Yuden Japan and Taiyo Yuden Phils whereby the former extended a loan to the latter in the amount of JP620,000; and that Taiyo Yuden Phils agreed to pay in lump on February 23, 2001 the principal and interest at 0.805% per annum (computed on daily basis) subject to the condition of the market interest rate in Japan. It is further represented that a copy of the Annual Income Tax Return and Audited Financial Statements for the fiscal years ending March 31, 2002 and 2001 of the Taiyo Yuden Japan Manila Representative Office does not reflect any income from operations in the Philippines; that the operating expenses of the representative office are fully subsized by Taiyo Yuden Phils. 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; "b) 15 per cent of the gross amount of the interest in all other cases. TIEHSA xxx xxx xxx "(6) The provisions of paragraph (1), (2) and (3) above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above mentioned provisions, if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15% of the gross amount of the interest if such interest to be paid does not arise from Government securities or bonds or debentures in which case, the 10% preferential tax rate be applied. These preferential tax rates however, shall not apply if the following circumstances are present, viz : (1) the recipient of the interest, being the resident of Japan, carries on business in the Philippines through a permanent establishment situated therein in and (2) the debt-claim in respect of the interest is paid is effectively connected with such permanent established. In such case, the pertinent provisions on business profits (i.e. Article 7) of the RP-Japan tax treaty shall be applied. The term "permanent establishment" is defined in Article 5 of the RP-Japan tax treaty which provides, to wit: "Article 5 "Permanent Establishment "1. For the purpose of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes especially: a) A store or other sales outlet; b) A branch; c) An office; d) A factory; e) A workshop; f) A warehouse; g) A mine, an oil or gas well, a quarry or other place of extraction of natural resources. "3. A building site or construction or installation projects constitutes permanent establishment only if it lasts more than six months. "4. Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall deemed not to include: xxx xxx xxx d) the maintenance of a fixed place of business solely for the purpose of purpose of carrying on, for the enterprise, or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character." xxx xxx xxx Considering the foregoing, and the alleged fact that the said representative office acts exclusively for information collection and dissemination on behalf of Taiyo Yuden Japan and for other activities which are preparatory and auxiliary in character, it is clear that said representative office is not deemed to constitute a permanent establishment of Taiyo Yuden Japan in the Philippines. ( BIR Ruling No. 175-85 dated September 30, 1985 ) Accordingly, Taiyo Yuden Japan is not deemed to have a permanent establishment in the Philippines to which the debt-claim may be attributed to. Therefore, your opinion that the interest payment by Taiyo Yuden Phils to Taiyo Yuden Japan is subject to the preferential tax rate of 15% pursuant to Article 11 of the RP-Japan tax treaty is hereby confirmed. ( BIR Ruling No. 26-00 dated January 13, 2000 ) However, the WC-CLA executed by and between them 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 parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service