February 12, 2009

DA ITAD BIR RULING NO. 017-09

Articles 11 & 22,

Philippines-Singapore Tax Treaty;
BIR Ruling No. DA-ITAD-055-02

Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City

Attention: J.A. Osana

Tax Division

Gentlemen :

This refers to your application for tax treaty relief dated December 7, 2007, on
behalf of your client, Panasonic Communications Philippines Corporation (PCP),
requesting confirmation of your opinion that the tax sparing provision of the
Philippines-Singapore tax treaty applies to PCP with respect to the interest income
that it derived from its deposit and lending transactions with Panasonic Finance Asia
(PAPP-PFI), a division of Panasonic Asia Pacific Pte Ltd. (PAPP), formerly known as
Matsushita Electric Asia Pte Ltd. (MEA).

It is represented that PCP is a corporation organized and existing under the

laws of the Philippines with principal office at Lot 3 C-8 Carmelray Industrial Park II,
Calamba, Laguna; that PAPP with office at 300 Beach Road #17-01, The Concourse,
Singapore 199555, is a resident of Singapore for income tax purposes for the Years of
Assessment 2006 to 2008, per Certification of Tax Residence issued by the Inland
Revenue Authority of Singapore; that PAPP is not registered either as a corporation or
as a partnership as shown in the Certification of Non-Registration dated December 10,
2007 issued by the Philippine Securities and Exchange Commission.

It is further represented that PAPP is the regional headquarters for the Asia and
Oceania region of Matsushita/Panasonic Group of Companies; it was granted by the
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 Monetary Authority of Singapore (MAS) license to operate as a Finance Treasury
Centre in Singapore; the MAS renewed the FTC license for another five (5) years in
April 2004, prior to the change in corporate name of MEA to PAPP on October 1,
2004; that as a Finance Treasury Centre, PAPP-PFI operates as an in-house bank for
approved network companies in the region; that PCP is one of those network
affiliates, and as such, PCP availed the finance treasury services of PPAP-PFI; that
PCP has deposit accounts with and other loans to PPAP-PFI on which the latter pays
the former interests. AHaETS

It is further represented that under the Income Tax Act of Singapore, interest
income of PCP and other network companies derived from their transactions with
PAPP-PFI is exempt from the withholding tax in Singapore; and that the issue/s or
transaction subject of the above request for ruling is not under investigation, on-going
audit, administrative protest, claim for refund or issuance of a tax credit certificate,
collection proceedings, or a judicial appeal of the taxpayer/s involved.

In reply, please be informed that Article 11 of the Philippines-Singapore tax

treaty provides as follows:

"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. CTHDcS

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

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 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.

xxx xxx xxx"

Pursuant to the aforesaid provisions, interest income which arises in Singapore

and paid to a resident of Philippines is taxable in Singapore at the preferential tax rate
not exceeding 15% of the gross amount of the interest if the recipient of such interest
is also the beneficial owner thereof.

However, it must be noted that under Singapore's concessionary tax regime for
PAPP-PFI, interest payments made by PAPP-PFI to approved affiliates that are not
resident of Singapore, such as PCP, shall be exempt from tax in Singapore by virtue
of Section 13 (4) (formerly, Section 13 (2)) of the Singapore Income Tax Act, which
was the basis for Gazette notifications S421/93 and S184/96. Pursuant to said Section,
Mr. Ngiam Tong Dow, Permanent Secretary of the Ministry of Finance of Singapore,
issued Notification No. S 421, paragraph 2 of which states as follows:

"2. There shall be exempt from tax the interest in connection with
any loan paid by a company which is approved as a Finance and Treasury
Centre under Section 43 (G) of the Act —

a) in currencies other than Singapore dollars; and

b) to any of its offices or associated companies

outside Singapore which has been approved for the purposes of
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 this Notification by the Minister or such other person as he may
appoint."

As a matter of fact, the last paragraph of Section 2 of the letter dated 19 April 2004,
issued by the MAS conferring renewal of approved FTC status to MEA, now known
as PAPP, provides as follows;

"To facilitate the conduct of FTC activities, and pursuant to Section

13(4) of the Income Tax Act, we have also approved the waiver of
withholding tax on interest payable by MEA on the following for the conduct
of qualifying FTC activities:

a) Foreign currency denominated loans from banks

and non-bank financial institutions outside Singapore;

b) Foreign currency denominated loans from its

approved network companies;"

That on 2 October 2007, MAS sent a letter updating the list of network
companies that have changed their name from "Matsushita" to "Panasonic" due to the
re-branding exercise by the company, and one of those network companies is PCP.

Hence, any interest that PCP will derive from its transactions with PAPP-PFI
will be exempt from the 15% tax in Singapore.

On the other hand, insofar as Philippine taxes are concerned, as a domestic

corporation, PCP is subject to the corporate income tax on its net taxable income from
sources within and outside of the Philippines pursuant to Section 27 (A) & (E) and
Section 22 (B) & (C) of the National Internal Revenue Code (NIRC) of 1997, as
amended, applies in general. It provides:

"Section 27. Rates of Income Tax on Domestic Corporations. —

xxx xxx xxx

(A) In General. — Except as otherwise provided in this Code, on

income tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived during each taxable year from all sources within and without
the Philippines by every corporation, as defined in Section 22(B) of this Code
and taxable under this Title as a corporation, organized in, or existing under
the laws of the Philippines: Provided, That effective January 1, 2009, the rate
of income tax shall be thirty percent (30%). DaCTcA

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 xxx xxx xxx

(E) Minimum Corporate Income Tax on Domestic Corporations. —

(1) Imposition of Tax. — A minimum corporate

income tax of two percent (2%) of the gross income as of the
end of the taxable year, as defined herein, is hereby imposed on
a corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. — Any

excess of the minimum corporate income tax over the normal
income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable
years.

(3) Relief from the Minimum Corporate Income Tax

Under Certain Conditions. — The Secretary of Finance is
hereby authorized to suspend the imposition of the minimum
corporate income tax on any corporation which suffers losses
on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations
that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case.

xxx xxx xxx

"SEC. 22. Definitions. — When used in this Title:

xxx xxx xxx

(B) The term 'corporation' shall include partnerships, no matter how

created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not include
general professional partnerships and a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum,
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 coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. 'General
professional partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.

(C) The term 'domestic', when applied to a corporation, means

created or organized in the Philippines or under its laws.

xxx xxx xxx"

Thus, the interest income that PCP will receive from PPAP-PFI will form part of its
gross income from worldwide sources for purposes of computing its net taxable
income subject to the 35% regular income tax or 2% minimum corporate income tax.

In this connection, Section 34 (C) of the NIRC of 1997, as amended, allows a

domestic corporation to credit against its regular corporate income tax liability the
amount of income taxes paid or incurred during the taxable year to any foreign
country with respect to income derived from sources outside of the Philippines.
Specifically, Section 34 (C) provides:

"Sec. 34. Deductions from Gross Income. —

xxx xxx xxx

(3) Credit Against Tax for Taxes of Foreign Countries. — If the

taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with:

(a) Citizen and Domestic Corporation. — In the case

of a citizen of the Philippines and of a domestic corporation,
the amount of income taxes paid or incurred during the taxable
year to any foreign country; and

(b) Partnerships and Estates. — In the case of any

such individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the
taxable year to a foreign country, if his distributive share of the
income of such partnership or trust is reported for taxation
under this Title.

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 An alien individual and a foreign corporation shall not be allowed the
credits against the tax for the taxes of foreign countries allowed under this
paragraph. DCAHcT

(4) Limitations on Credit. — The amount of the credit taken under

this Section shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid

or incurred to any country shall not exceed the same proportion
of the tax against which such credit is taken, which the
taxpayer's taxable income from sources within such country
under this Title bears to his entire taxable income for the same
taxable year; and

(b) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is taken,
which the taxpayer's taxable income from sources without the
Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.

xxx xxx xxx"

Thus, as a general rule, a domestic corporation like PCP may claim tax credit
for the amount of income taxes paid or incurred during the taxable year to a foreign
country like Singapore. aAHDIc

In this connection, Article 22 of the Philippines-Singapore tax treaty provides

as follows:

"Article 22

ELIMINATION OF DOUBLE TAXATION

1. Subject to the laws of Singapore regarding the allowance as a

credit against Singapore tax of tax payable in any country other than
Singapore, Philippine tax payable in respect of income derived from the
Philippines shall be allowed as a credit against Singapore tax payable in
respect of that income. Where such income is a dividend paid by a company
which is a resident of the Philippines to a company which is a resident of
Singapore and which owns not less than 15 per cent of voting shares of the
company paying the dividend, the credit shall take into account the Philippine
tax payable by that company in respect of its income. The credit shall not,
however, exceed that part of the Singapore tax, as computed before the credit
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 is given, which is appropriate to such item of income.

2. The term 'Philippine tax payable' shall be deemed to include the

amount of Philippine tax which would have been paid if the Philippine tax
had not been exempted or reduced in accordance with this Convention and the
special incentive laws designed to promote economic development in the
Philippines, effective on the date of signature of this Convention, or which
may be introduced in the future in the Philippine taxation laws in modification
of, or in addition to, the existing laws. IcCATD

3. Subject to the laws of the Philippines regarding the allowance as

a credit against Philippine tax of tax payable in any country other than the
Philippines, Singapore tax payable in respect of income derived from
Singapore shall be allowed as a credit against the Philippine tax payable in
respect of that income. Where such income is a dividend paid by a company
which is a resident of Singapore to a company which is a resident of the
Philippines and which owns not less than 15 per cent of the voting shares of
the company paying the dividend, the credit shall take into account the
Singapore tax payable by that company in respect of its income. The credit
shall not, however, exceed that part of the Philippine tax, as computed before
the credit is given, which is appropriate to such item of income.

4. The term 'Singapore tax payable' shall be deemed to include the

amount of Singapore tax which would have been paid if the Singapore tax had
not been reduced in accordance with this Convention and the special incentive
laws designed to promote economic development in Singapore, effective on
the date of signature of this Convention, or which may be introduced in the
future in the Singapore taxation laws in modification of, or in addition to, the
existing laws.

xxx xxx xxx"

Under the aforequoted provisions, a Philippine resident is entitled to a tax

credit for Singapore tax payable in respect of income derived from Singapore.
However, if tax due in Singapore is reduced in accordance with special incentives
laws designed to promote economic development, such foregone tax is still considered
a "Singapore tax payable" as defined in paragraph 4 of Article 22, which would then
be allowed as tax credit against Philippine tax payable in respect of such income,
subject to the provision of paragraph 3 of Article 22.

In view of all the above, this Office is of the opinion and so holds that the tax
sparing provision of the Philippines-Singapore tax treaty is applicable to PCP
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 considering that the interest income it derives on its deposit and lending transactions
with PAPP-PFI shall be exempt from the 15% tax in Singapore by virtue of the MAS
letters to PAPP-PFI dated 19 April 2004 and 2 October 2007. So, for purposes of
computing its net taxable income, PCP should be allowed to claim tax credit in the
Philippines equivalent to the amount of tax that PAPP-PFI would otherwise be
required to withhold from PCP's interest income had the government of Singapore not
granted tax exemption, pursuant to Article 22 (3) of the Philippines-Singapore tax
treaty. (BIR Ruling No. DA-ITAD 055-02 dated April 22, 2002)

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. cIETHa

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) GREGORIO V. CABANTAC

Deputy Commissioner
Bureau of Internal Revenue

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