BIR Ruling [DA-323-98]

July 17, 1998 BIR RULING [DA-323-98] Romulo Mabanta Buenaventura Sayoc & de los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Attys . Edmundo P . Guevara and Jayson L . Fernandez Gentlemen : This refers to your letter dated April 8, 1997 requesting for confirmation of your opinion that interest income derived by your client, Peregrine Sewu Securities (hereinafter called "Peregrine"), on its investments in bonds, notes and other government securities issued by the Philippine Government or a political subdivision or local authority thereof, including but not limited to Philippine Government Bonds, Floating Rate Notes with interest coupons, CB Bills and Notes and Treasury Bills and Notes, are exempt from Philippine income tax and consequently from Philippine withholding tax pursuant to Article 11 (3) of the RP-Indonesia Tax Treaty. cdtech It is represented that your client, Peregrine, is a corporation duly organized and existing under the laws of the Republic of Indonesia and is not engaged in trade or business in the Philippines; that as part of its international investment operations, Peregrine will acquire various interest-bearing bonds, notes and other government securities issued by the Philippine government, including but not limited to Philippine Government bonds, floating rate notes with interest coupons, CB bills and notes and Treasury bills and notes. In reply, please be informed that Article 11 (3) of the RP-Indonesia 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 also be taxed in the Contracting 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 15 percent of the gross amount of interest. "3. Notwithstanding the provision 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 the other State, if the interest is paid in respect of; "(i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof; "(ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Central Bank of the Philippines, or the "Bank Indonesia" (the Central Bank of Indonesia), or any other lending institution, as may be specified and agreed in letters exchanged between the competent authorities of the Contracting States; xxx xxx xxx" (Emphasis supplied.) It is clear from the aforequoted provisions of the RP-Indonesia Tax Treaty that interest income of a resident of Indonesia arising from the Philippines shall be exempt from Philippine income tax if the payor of the interest is the Government of the Philippines, a political subdivision or local authority thereof. Since in this case the Philippine Government is the payor of the interest derived from bonds, notes and other government securities such as Philippine Government Bonds, Floating Rate Notes with interest coupons, CB Bills and Notes and Treasury Bills and Notes, the interest income from such investments that may be received by Peregrine, a resident of Indonesia, shall not be subject to Philippine income tax imposed under Section 32(A)(7)(a) of the Tax Code of 1997 (formerly Section 28(b)(8)(A) of the Tax Code of 1977) and consequently to creditable withholding tax. (BIR Ruling No. 020-96 dated February 21, 1996) casia 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. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group