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Paula Corporation, a non-resident foreign corporation (NRFC) incorporated in Australia, loaned P6,000,000 to Anna Corporation, one of its affiliates incorporated in the Philippines. Paula Corporation charges 12% interest on intercompany loans to other affiliates. Paula Corporation is contemplating whether to charge Anna Corporation the same rate. Under the Tax Code, interest expense payable to an NRFC is subject to 20% final tax, unless the company intends to apply for a tax treaty relief with the Bureau of Internal Revenue (BIR), which allows a lower interest rate of 15%, based on RP-Australia Tax Treaty in 1979.
Problem a. Discuss the tax implication if Paula Corporation will charge Anna Corporation 12% interest without invoking the tax treaty relief.
Problem b. What is the best action that should be taken by Anna Corporation? Is this in the best interest of Paula Corporation?
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