ITAD Ruling No. 195-00

December 8, 2000 ITAD RULING NO. 195-00 RP-US Article 12 ITAD 84-00 Bush Boake Allen Philippines, Inc. 10-B Reliance cor. Brixton Streets 1600 Pasig City Attention: Nelia G . Corpuz Accounting/Finance Manager Gentlemen : This refers to your application for relief from double taxation dated July 12, 2000, on behalf of Bush Boake Allen Inc. (USA), to avail of the preferential tax rate of 15 per cent final withholding tax on your interest remittances pursuant to the RP-US Tax Treaty. It is represented that Bush Boake Allen Inc. (BESA USA) is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal address at 7 Mercedes Drive, Montvale, New Jersey; that it has no permanent establishment in the Philippines; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated June 28, 2000; that Bush Boake Allen Philippines (BBA Phil) is a corporation duly organized and existing under Philippine Laws and engaged in the manufacture of flavors, seasonings and fragrances; that on May 3, 2000, BBA Phil and BBA USA entered into a loan agreement whereby former promised to pay, for value received, Twenty Million Pesos (PHP20,000,000.00) to the latter, payable on August 10, 2000 together with interest on the unpaid principal amount at the rate equal to the short term applicable interest of 6.753 per cent. DHITSc In reply, please be informed that Article 12 paragraph 2 of the RP-US Tax Treaty which reads, viz: "Article 12 " INTEREST "1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. HaEcAC "2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest . (emphasis supplied) "3. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. DaTISc "xxx xxx xxx "5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other 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 a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. "xxx xxx xxx" "7. The term "interest" as used in this Convention 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, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." TESICD Based on the foregoing, interest payments to a recipient which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten per cent (10%) of the gross amount of interest if with respect to public issues of bonded indebtedness; and a tax rate not exceeding fifteen per cent (15%) of the gross amount of interest in all other cases. Such being the case, and since BBA USA is not registered to engage in business in the Philippines through a permanent establishment situated therein and the interest is not with respect to public issues of bonded indebtedness, the interest payment to be remitted by Bush Boake Allen Philippines (BRA Phil) to Bush Boake Allen Inc. (BBA USA) is subject to the preferential tax rate of 15 per cent pursuant to the RP-US Tax Treaty. IHEaAc Moreover, the loan agreement as evidenced by the Standard I/C Form of Note dated May 3, 2000 is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue 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