March 11, 2020

ITAD BIR RULING NO. 033-20

Article 11 Philippines-Japan tax treaty,

as amended
Sycip Gorres Velayo and Co.
6760 Ayala Avenue
1226 Makati City

Attention: AAA
_____________________

Gentlemen :
This refers to your application for tax treaty relief filed on behalf of
NEC Tokin Electronics (Philippines), Inc. ("NEC Tokin Philippines") on
January 11, 2012 requesting confirmation that:
a) Interest paid by NEC Tokin Philippines to Sumitomo
Trust and Banking Company Ltd. ("Sumitomo Trust
Bank") under a Loan Agreement is subject to income tax at
the rate of 10% pursuant to the Convention between the
Republic of the Philippines and Japan for the
Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income
("Philippines-Japan tax treaty"); 1 and
b) The Loan Agreement is not subject to documentary stamp
tax because the borrower, NEC Tokin Philippines, is an
enterprise registered with the Philippine Economic Zone
Authority ("PEZA"), and that the creditor, Sumitomo Trust
Bank, is a nonresident foreign corporation which is outside
the taxing jurisdiction of the Philippines.
FACTS
Sumitomo Trust Bank is a foreign corporation organized and existing
under the laws of Japan and a resident thereof based on its amended
Articles of Incorporation and Certificate of Residence issued by the Higashi
Tax Office in Japan. Sumitomo Trust Bank is engaged in the trust business;
in accepting deposits and installment savings, extending loans, discounting
bills and notes and exchange transactions; in guaranteeing obligations,
accepting bills and notes and any other business incidental to the banking
business, among others. It is not registered as a corporation or partnership
in the Philippines based on the Certification of Non-Registration of Company
issued by the Securities and Exchange Commission. On the other hand, NEC
Tokin Philippines is a domestic corporation engaged in manufacturing
electro-mechanical devices such as relays. It is also registered with the
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 Philippine Economic Zone Authority ("PEZA"). CAIHTE

On September 30, 2011, NEC Tokin Philippines and Sumitomo

Trust Bank (through its branch office in Singapore) entered into a Loan
Agreement where Sumitomo Trust Bank granted NEC Tokin Philippines
a credit facility to not exceed US$______________, to finance its capital
expenditures. NEC Tokin Philippines shall draw an advance from the
facility of at least US$______________, and in multiples of US$______________. The
facility shall become available beginning September 30, 2011 until
September 28, 2012. Each advance shall bear interest at the rate equivalent
to the cost of funding the advance as determined by Sumitomo Trust
Bank for a particular interest period in a particular interbank market, plus a
margin of 0.75% per annum. NEC Tokin Philippines shall select the
interest period for the advance that is acceptable to Sumitomo Trust
Bank. All outstanding advances and interest shall be paid not later than
September 30, 2013.
Based on a sworn statement issued by NEC Tokin Philippines, the
income subject of this ruling is not under investigation, on-going audit,
administrative protest, claim for refund or issuance of a tax credit
certificate, collection proceeding, or judicial appeal. aScITE

RULING
A. Income tax
In reply, please be informed that under Section 28 (B) (5) (a) of the
National Internal Revenue Code of 1997 ("Tax Code"), as amended, interest
on foreign loans received by a nonresident foreign corporation is subject to
income tax at the rate of 20%, to wit:
"SEC. 28. Rates of Income Tax on Foreign
Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
(5) Tax on Certain Incomes Received by a Nonresident
Foreign Corporation. —
(a) Interest on Foreign Loans. — A final withholding
tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans
contracted on or after August 1, 1986."
However, under Section 32 (B) (5) of the Tax Code, such income is
exempt or partially exempt to the extent required by any treaty obligation
on the Philippine government, thus:
"SEC. 32. Gross Income. —
xxx xxx xxx
(B) Exclusions from Gross Income. — The following items
shall not be included in gross income and shall be exempt
from taxation under this Title:
xxx xxx xxx
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 (5) Income Exempt under Treaty. — Income of any kind,
to the extent required by any treaty obligation binding
upon the Government of the Philippines."
In this connection, paragraph 2, Article 11 of the Philippines-Japan tax
treaty, as amended, provides relief 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 10 per cent of the gross amount of the interest.
Under Article 11, interest arising in the Philippines and paid to a resident of
Japan is subject to income tax in the Philippines at a rate not exceeding 10%.
Accordingly, since Sumitomo Trust Bank is a resident of Japan, such
interest paid by NEC Tokin Philippines to Sumitomo Trust Bank
(through its branch office in Singapore) under the Loan Agreement is subject
to income tax at the rate of 10% pursuant to paragraph 2, Article 11 of the
Philippines-Japan tax treaty, as amended. HEITAD

B. Documentary stamp tax

Furthermore, under Section 179 of the Tax Code, the Loan Agreement,
being a debt instrument, is subject to documentary stamp tax ("DST")
equivalent to P1.00 for every P200.00 (or a fraction thereof) of the total
amount of the loan, to wit:
"SEC. 179. Stamp Tax on All Debt Instruments. — On
every original issue of debt instruments, there shall be collected a
documentary stamp tax of One peso (P1.00) on each Two hundred
pesos (P200), or fractional part thereof, of the issue price of any such
debt instrument: Provided, That for such debt instruments with terms
of less than one (1) year, the documentary stamp tax to be collected
shall be of a proportional amount in accordance with the ratio of its
terms in number of days to three hundred sixty-five (365) days:
Provided, further, That only one documentary stamp tax shall be
imposed on either loan agreement, or promissory notes issued to
secure such loan . . ."
Beginning January 1, 2018, the DST imposed on a debt instrument
shall now be P1.50 on every P200.00, or fractional part thereof, of the issue
price of the debt instrument, pursuant to Section 55 of Republic Act No.
10963, otherwise known as the Tax Reform for Acceleration and
Inclusion (hereinafter referred to as the TRAIN Law), which took effect on
that date. Section 179 of the Tax Code now reads as follows:
"SEC. 179. Stamp Tax on All Debt Instruments. — On
every original issue of debt instruments, there shall be collected a
documentary stamp tax of One peso and fifty centavos (P1.50) on
each Two hundred pesos (P200), or fractional part thereof, of the
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 issue price of any such debt instrument: Provided, That for such debt
instruments with terms of less than one (1) year, the documentary
stamp tax to be collected shall be of a proportional amount in
accordance with the ratio of its terms in number of days to three
hundred sixty-five (365) days: Provided, further, That only one
documentary stamp tax shall be imposed on either loan agreement,
or promissory notes issued to secure such loan . . ."
It must be noted, however, that a credit facility agreement, like the
agreement in this case, is not subject to DST. The tax shall only be imposed
on every utilization request executed by the parties and based on the
amount drawn and approved by the creditor. In the event that NEC Tokin
Philippines draws an advance from the credit facility, the resulting loan
agreement shall definitely be subject to DST.
Who has the liability to pay the DST is another issue. You argued that
the loan agreement is not subject to DST because NEC Tokin Philippines is
a PEZA-registered entity and thus, exempt from DST, while Sumitomo
Trust Bank is a nonresident foreign corporation and as such, it is outside
the taxing jurisdiction of the Philippines.
Verily, PEZA-registered entities like NEC Tokin Philippines in this
case are accorded tax privileges under Republic Act No. 7916 ("RA No.
7916"), otherwise known as The Special Economic Zone of 1995, as
amended by Republic Act No. 8748. The pertinent provision of RA No. 7916
reads as follows:
"SEC. 24. Exemption from National and Local Taxes. —
Except for real property taxes on land owned by developers, no
taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five
percent (5%) of the gross income earned by all business enterprises
within the ECOZONE shall be paid and remitted as follows: ATICcS

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the
business establishments to the treasurer's office of the
municipality or city where the enterprise is located."
(Emphasis supplied)
Based on the foregoing, NEC Tokin Philippines is exempt from the
following national internal revenue taxes:
a) Income tax;
b) Estate and donor's taxes;
c) Value-added tax;
d) Other percentage taxes;
e) Excise taxes;
f) Documentary stamp taxes; and
g) Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue.

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 Therefore, if NEC Tokin Philippines obtains a loan based on the
credit facility agreement and the same is utilized as intended in pursuit of its
PEZA-registered activities, then it shall not be subject to DST pursuant to the
above provision. However, this exemption does not mean that the loan
agreement is totally free from DST since Section 173 of the Tax Code states
that if one party to the loan agreement enjoys exemption from the said tax,
the non-exempt party shall be the one directly liable, thus:
"SEC. 173. Stamp Taxes Upon Documents, Loan
Agreements, Instruments and Papers. — Upon documents,
instruments, loan agreements and papers, and upon acceptances,
assignments, sales and transfers of the obligation, right or property
incident thereto, there shall be levied, collected and paid for, and in
respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following Sections of this
Title, by the person making, signing, issuing, accepting, or
transferring the same wherever the document is made, signed,
issued, accepted or transferred when the obligation or right arises
from Philippine sources or the property is situated in the Philippines,
and the same time such act is done or transaction had: Provided,
That whenever one party to the taxable document enjoys
exemption from the tax herein imposed, the other party who
is not exempt shall be the one directly liable for the tax."
(Emphasis supplied) TIADCc

Therefore, Sumitomo Trust Bank cannot escape the imposition and

payment of DST by simply positing that it is a nonresident foreign
corporation, hence, outside the reach of taxation. Indeed, Section 173
intends to impose DST on all documents when the obligation or right subject
thereof arises from Philippine sources or the property subject thereof is
situated in the Philippines, without regard to the residence or nationality of
the parties.
This ruling is issued on the basis of the facts as represented. However,
if upon investigation it shall be disclosed that the actual facts are different,
then this ruling shall be without force and effect insofar as the herein parties
are concerned.

Very truly yours,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue

Footnotes
1. As amended by the Protocol Amending the Convention between the
Republic of the Philippines and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income effective January 1, 2009 .

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