ITAD Ruling No. 200-02

November 21, 2002 ITAD RULING NO. 200-02 RP-Japan Tax Treaty Article 11-Interest BIR Ruling ITAD 167-02 Avisado Agan Nidea Montenegro & Associates 9th Floor, LPL Towers, 112 Legazpi Street, Legazpi Village, Makati City Attention: Atty. Rommel S. Agan Atty. J. Carlito M. Montenegro Gentlemen : This refers to your application for relief from double taxation dated September 25, 2002, on behalf of your client, Nittetsu Micrometal Corporation Philippines (Nittetsu), requesting confirmation of your opinion that the interest paid by Nittetsu to Nippon Micrometal Corporation (Nippon) is subject to the 15% preferential tax rate pursuant to Article 11(2)(b) of the RP-Japan tax treaty. STIHaE It is represented that Nippon is a corporation organized and existing under the laws of Japan with business address at 158-1, Sayamagahara, Iruma City, Saitama 358-0032, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 14, 2002; that Nittetsu is a corporation duly organized and existing under the laws of the Philippines with principal address at First Industrial Park, Sto. Tomas, Batangas; that on June 29, 2001, Nittetsu entered into a Credit Agreement with Nippon whereby Nittetsu was granted a loan in the amount of Two Million One Hundred Thousand US Dollars (US$2,100,000.00) for purposes of financing the purchase of machinery, accessories and materials and the construction of Nittetsu's manufacturing plant at First Philippine Industrial Park in Sto. Tomas, Batangas; and that the loan shall bear interest based on the US$ TIBOR rate (4.18%) existing as of the first day (June 29, 2001) of the credit agreement plus 0.4% to be computed based on the outstanding balance of the principal amount. In reply, please be informed that Article 11 of the RP-Japan tax treaty provides 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 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 amount of the interest in all other cases. "xxx xxx xxx "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." It is clear from the abovecited provisions that interest payments arising in the Philippines and paid to a resident of Japan shall be taxed at a rate not exceeding ten percent (10%) of the gross amount thereof if it is paid in respect of Government securities, or bonds, or debentures, and fifteen percent (15%) in all other case. Such being the case, this Office is of the opinion and so holds that the interest payments of Nittetsu to Nippon pursuant to the subject credit agreement are subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 11(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-167-02 dated September 30, 2002 ) Moreover, the Credit Agreement executed by Nittetsu and Nippon shall also be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service