BIR Ruling [DA-167-99]

March 19, 1999 BIR RULING [DA-167-99] SyCip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas 1200 Makati City Attention: Atty . Euney Marie J . Mata-Perez and Atty . Renato B . Lopez, Jr . Gentlemen : This refers to your letter dated July 29, 1998 requesting for a ruling exempting your client, ABN AMRO Bank N.V. ("ABN AMRO"), from the payment of income tax on interest derived from investments in bonds and treasury bills issued by the government of the Republic of the Philippines pursuant to Article 11, paragraph 3 of the RP-Netherlands Tax Treaty and payment of capital gains tax on the sale of such bonds and treasury bills issued by the government of the Republic of the Philippines pursuant to Article 13, paragraph 4 of the RP-Netherlands Tax Treaty. aisadc It is represented that ABN AMRO is a corporation existing under the laws of the Kingdom of the Netherlands with a branch in the Philippines; that it intends to purchase bonds and treasury bills issued by the government of the Republic of the Philippines; that these investments will not be made or held by its Philippine branch, but by ABN AMRO's offices and branches outside the Philippines; and that ABN AMRO expects to derive income in the form of, interest and capital gain in the event that it decides to sell said bonds and treasury bills. In reply, pleased be informed that with regard to the payment of income taxes on interest income derived from bonds and treasury bills issued by the government of the Republic of the Philippines, Article 11 of the RP-Netherlands Tax Treaty provides as follows: "ARTICLE 11 "INTEREST "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such interest may also be taxed in the State in which it arises and according to the laws of that 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 if such interest is paid: "i) in connection with the sale on credit of any industrial, commercial or scientific equipment; or "ii) on any loan of whatever kind granted by a bank, or any other financial institution; "iii) in respect of public issues of bonds, debentures or similar obligations. "b) 15 percent of the gross amount of the interest in all other cases. "3) Notwithstanding the provisions of paragraph 2: "a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State ; "b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State . . ." (Emphasis supplied) It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that interest income derived from bonds, debentures or other similar obligations of the Philippine Government by a resident of the Netherlands shall be exempt from Philippine income tax. Considering that if the Philippine Government is the payor of the interest derived from said bonds, debentures and treasury bills in which ABN AMRO intends to make investments, the interest income from the same shall be exempt from the payment of Philippine income tax. (BIR Ruling No. 020-96 dated February 21, 1996) With regard to the payment of capital gains tax if ABN AMRO decides to sell such bonds and treasury bills issued by the government of the Republic of the Philippines, please be informed that Article 13 of the RP-Netherlands Tax Treaty provides as follows: "Article 13 "GAINS FROM THE ALIENATION OF PROPERTY "1. Gains derived from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. "2. Gains derived from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or such a fixed base, may be taxed in the other State. "3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State. "4. Capital gains from alienation of any property other than those mentioned in paragraphs 1, 2 and 3 shall be taxable only in the State of which the alienator is a resident . "5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first mentioned State at any time during the six years immediately preceding the alienation of the property." (Emphasis supplied). It is clear from the aforequoted provisions of the RP-Netherlands Tax Treaty that capital gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering the intended sale of bonds and treasury bills issued by the government of the Republic of the Philippines is not among those mentioned in paragraphs 1, 2, and 3 of Article 13 of the tax treaty, the gains that may be derived by ABN AMRO, which is a resident of the Netherlands, from the sale of bonds and treasury bills issued by the government of the Republic of the Philippines, shall not be subject to Philippine income tax under Section 28(A)(1) of the Tax Code of 1997, but are subject to tax only in the Netherlands. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdtech Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue