ITAD Ruling No. 193-03

December 16, 2003 ITAD RULING NO. 193-03 RP-Netherlands tax treaty Article 11 BIR Ruling No. ITAD-10-99 Philips Semiconductors Philippines, Inc. Philips Avenue, Light Industry and Science Park Cabuyao, Laguna Attention: Mr. Herminigildo A. Salazar Manager, Finance & Accounting, and Business Control Gentlemen : This refers to the renewal of your application for relief from double taxation dated November 5, 2003, requesting confirmation of your opinion that interest payments made by Philips Semiconductors Philippines, Inc. (PSPI) to Koninklijke Philips Electronics N.V. (KPEN) are subject to the preferential tax rate of 15% pursuant to Article 11 of the RP-Netherlands tax treaty. It is represented that KPEN is a nonresident foreign corporation organized and existing under the laws of the Netherlands with principal address at Groenewoudsewg 1, 5621 BA Eindhoven, the Netherlands; that is not registered either as a corporation or as a partnership in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated November 13, 2003; that PSPI is a corporation organized and existing under the laws of the Philippines with business address at Philips Avenue, Light Industry and Science Park I, Bo. Diezmo, Cabuyao, Laguna; that on July 11, 2003, A Credit Facility Agreement was entered into by and between KPEN and PSPI in an aggregate amount of USD34,000,000 (Thirty Four Million United States Dollars) which will expire on July 31, 2004; and that the proceeds of the loan will be used for general corporate purposes. In reply, please be informed that Article 11 of the RP-Netherlands tax treaty provides as follows: "Article 11 "Interest "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. IHCSET "2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "a) 10 percent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) 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. "xxx xxx xxx "5. The term `interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. " Based on the aforequoted provisions, the interest income arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a preferential tax rate of not exceeding ten percent (10%) if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or on any loan of whatever kind granted by a bank, or any other financial institution, or in respect of public issues of bonds, debentures or similar obligations; and in all other cases, fifteen percent (15%) of the gross amount of the interest. Such being the case, this office hereby confirms your opinion that the interest payments by PSPI to KPEN shall be subject to a preferential tax rate of fifteen percent (15%) pursuant to Article 11(2)(b) of the RP-Netherlands tax treaty. (BIR Ruling No. ITAD-10-99 dated June 22, 1999) Moreover, the Credit Facility Agreement executed by and between PSPI and KPEN shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. SHTcDE This ruling is issued on the basis of 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. aHESCT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service