ITAD Ruling No. 233-02

December 27, 2002 ITAD RULING NO. 233-02 RP-Singapore Art. 11 NIRC Sec. 180 BIR Ruling No. DA-ITAD 44-02 Philippine National Oil Company PNOC Building VI, Energy Center Meritt Road, Fort Bonifacio Attention: Ms . Bernadette B . Jugan Manager, Legal Department Gentlemen : This refers to your application for relief from double taxation dated October 1, 2001, on behalf of Sanwa Bank Ltd., Singapore Branch (SANWA), requesting confirmation of your opinion that the interest payments of the Philippine National Oil Company (PNOC) to SANWA are subject to the preferential tax rate of ten percent (10%), pursuant to Article 11(7)(b) of the RP-Singapore tax treaty. aCHDST It is represented that SANWA is a bank and a foreign corporation organized and existing under the laws of Japan which has a branch in Singapore with business address at 6 Raffles Quay, #24-01 John Hancock Tower, Singapore 048580; that SANWA is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-Registration issued by the Securities and Exchange Commission (SEC) dated August 22, 2001; that PNOC is a Philippine government-owned and controlled corporation created by virtue of Presidential Decree No. 334; that on March 26, 2001, a Two Hundred Million US Dollar (US$ 200,000,000.00) loan facility was made available to PNOC as borrower by a group of banks; that one of the lender banks is SANWA with a participating amount of Fifteen Million US Dollars (US$ 15,000,000.00); that the said facility Loan Agreement was arranged by Citibank, N.A. Manila Branch and Citicorp International Ltd. and is fully guaranteed by the Republic of the Philippines; and that the loan shall be subject to an interest rate per annum which is the sum of the margin and LIBOR on the quotation date therefor. In reply please be informed that Article 11 of the RP-Singapore tax treaty provides, viz : "Article 11 "INTEREST "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. "xxx xxx xxx "7. Notwithstanding the provisions of paragraph 2, a) interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured, by such institutions as are specified and agreed in letters exchanged between the competent authorities of the Contracting States; and b) the Philippine tax on interest arising in the Philippines in respect of public issues of bonds, debentures or similar obligations and paid by a company which is a resident of the Philippines to a resident of Singapore shall not exceed 10 per cent of the gross amount of the interest." (Emphasis supplied) Based on the aforequoted provisions, entitlement to the 10% preferential tax rate is subject to the condition that the interest income must arise in respect of public issues of bonds, debentures or similar obligations. In ascertaining whether the subject loan facility is included in the phrase "similar obligations," the principle of " ejusdem generis " applies which states: "Where in the statute, general words follow a designation of particular subjects or classes of persons, the meaning of the general words will ordinarily be presumed to be restricted by the particular designation, and to include only things or persons of the same kind, class or nature as those specifically enumerated." (BIR Ruling No. 205-86 citing Genato Commercial Corporation vs. CTA, et. al., G.R. No. L-1172) In other words, in order that the subject may come under the general clause, it is necessary that it belongs to the same kind or class therein specifically enumerated or possesses a common characteristic undoubtedly present to those specifically named. Otherwise, it should be deemed foreign or extraneous and is not included. Corollarily, the " similar obligations " that may come under the general clause should be of the same nature as those that have preceded them, meaning, "public issues of bonds and debentures." Bond is fundamentally an obligation, a written promise to pay money. Borrowing by means of bonds involves the issuance of certificates of indebtedness. Bond certificate may represent equal parts of the bond issue or they may be of varying denominations. The group contract between the corporation and the bondholder is known as the bond or trust indenture. Bonds may be sent by the company directly to investors or they may be underwritten by investment bankers or a syndicate. (International Accounting by Smith and Skousen, 7th Edition and Par. 25 11 Am Jur 2d) Applying the ejusdem generis rule, the subject loan facility guaranteed by the Philippine Government cannot be considered to be of the same kind, class or nature as public issues of bonds and debentures for which interest income is taxed at the rate of 10%. Nonetheless, this Office is of the opinion and so holds that the interest payments of PNOC to SANWA Bank are subject to the withholding tax at the preferential rate of 15% pursuant to Article 11(2) of the RP-Singapore tax treaty. Finally, the subject Facility Loan Agreement executed by PNOC and SANWA is subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. (BIR Ruling No. DA-ITAD 44-02) DcCHTa 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 the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service