BIR Ruling [DA-696-A-99]

December 17, 1999 BIR RULING [DA-696-A-99] Laya Managhaya & Co . 22/F Antel 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City Attention: Atty . R . A . Noval Gentlemen : This refers to your letter dated April 28, 1999, on behalf of your client Steel Corporation of the Philippines (STEEL), requesting for a confirmation of your opinion that: 1. Interest income derived by banks and other financial institutions from Philippine currency loans with maturity of five (5) years or more, granted to STEEL for its various and extensive manufacturing activities, shall exempt from the corporate income tax (33% for 1999 and 32% for the year 2000 and thereafter) imposed under Sections 27(A) and 28(A) of the National Internal Revenue Code (NIRC) of 1997, as well as the percentage tax on gross receipts of banks and non-bank financial intermediaries under Section 121 of the NIRC; 2. Interest income derived by banks and other financial institutions from foreign currency loans granted to STEEL for its various and extensive manufacturing activities, under the Expanded Foreign Currency Deposit System, with maturity of five (5) years or more, shall be exempt from the 10% final tax imposed under Sections 27(D)(3) and 28(A)(7)(b) of the NIRC; 3. Interest income derived by banks and financial institutions from foreign currency dominated loans granted to STEEL for its various and extensive manufacturing activities, shall be exempt from the 20% final withholding tax on foreign loans imposed under Section 28(B)(5)(a) of the NIRC or the applicable rate imposable under the provisions of the proper tax treaty with the country of which the lending bank or financial institution is a resident. Consequently, since the subject interest income is not subject to Philippine tax, STEEL shall not be required to withhold the tax on said income; and 4. Interest income derived by domestic and foreign banks and financial institutions from Philippine and foreign currency denominated loans granted to persons or entities who are Philippine nationals, the proceeds of which are invested by the Philippine nationals in the equity STEEL shall be exempt from the corporate income tax, the 10% final tax on FCDU's, the 20% final withholding tax or the applicable tax treaty rates on foreign loans, and the percentage tax on gross receipts, as the case may be. It is represented that Steel Corporation of the Philippines is a domestic corporation duly organized and existing under Philippine laws; that it was registered with the Securities and Exchange Commission on October 3, 1994; that it was granted Certificate of Eligibility No. 94-556 by the Board of Investments (BOI) on December 23, 1994 pursuant to the provisions of Republic Act No. 7103 and was issued Certificate of Registration DP-95-187 by the BOI on December 18, 1995 as New Domestic Producer of Flat Products on a preferred pioneer status pursuant to the provisions of Executive Order No. 226, as amended; and that STEEL is eligible for incentives under R.A. No. 7103 and E.O. No. 226. In reply, please be informed that pursuant to Section 6(c) of Republic Act No. 7103, otherwise known as "An Act to Strengthen the Iron and Steel Industry and Promote Philippine Industrialization and for Other Purposes," provides, viz: "Sec. 6 Incentives . All enterprises certified by the BOI in accordance with the foregoing section of this Act shall be entitled to the following incentives." xxx xxx xxx (c) Other Loans . The certified enterprise shall be authorized to contract; subject to the prior approval of the Central Bank of the Philippines, such loans, credits and indebtedness, from time to time and in any convertible foreign currency or capital goods, from foreign private financial institutions or fund resources as may be necessary to undertake the manufacturing activity described in Section 5(b) above. The Central Bank of the Philippines shall give priority to the applications made by certified enterprises to foreign currency loans, debt-asset and debt-equity conversion and such other transactions as may receive the approval of the Central Bank of the Philippines. The Government shall likewise encourage private financial institutions, whether domestic or foreign, to extend loans for equity investments of Philippine nationals in a certified enterprise. The interest income from loans with maturity of five (5) years or more extended by financial institutions shall be exempt from all national internal revenue taxes." Furthermore, Section 8 of the said Republic Act No. 7103 provides, as follows: " Sec. 8. Time Frame . All fiscal incentives in this Act shall apply for a duration consistent with the provisions of the Omnibus Investments Code: Provided , That in less developed areas, the duration shall be fifteen (15) years from the effectivity of this Act" Based on the foregoing and since Steel Corporation of the Philippines is a holder of Certificate of Eligibility under the provisions of R.A. 7103, interest income from loans with maturity of five (5) years or more extended by domestic and foreign financial institutions to it shall be exempt from all national internal revenue taxes for a period of fifteen (15) years. Accordingly, we confirm your opinion that: 1. Interest income derived by banks and other financial institutions from Philippine currency loans with maturity of five (5) years or more, granted to STEEL for its various and extensive manufacturing activities, shall exempt from the corporate income tax (33% for 1999 and 32% for the year 2000 and thereafter) imposed under Sections 27(A) and 28(A) of the National Internal Revenue Code (NIRC) of 1997, as well as the percentage tax on gross receipts of banks and non-bank financial intermediaries under Section 121 of the NIRC; 2. Interest income derived by banks and other financial institutions from foreign currency loans granted to STEEL for its various and extensive manufacturing activities, under the Expanded Foreign Currency Deposit System, with maturity of five (5) years or more, shall be exempt from the 10% final tax imposed under Sections 27(D)(3) and 28(A)(7)(b) of the NIRC; 3. Interest income derived by banks and financial institutions from foreign currency dominated loans granted to STEEL for its various and extensive manufacturing activities, shall be exempt from the 20% final withholding tax on foreign loans imposed under Section 28(B)(7)(a) of the NIRC or the applicable rate imposable under the provisions of the proper tax treaty with the country of which the lending bank or financial institution is a resident. Consequently, since the subject interest income is not subject to Philippine tax, STEEL shall not be required to withhold the tax on said income; and 4. Interest income derived by domestic and foreign banks and financial institutions from Philippine and foreign currency denominated loans granted to persons or entities who are Philippine nationals, the proceeds of which are invested by the Philippine nationals in the equity STEEL shall be exempt from the corporate income tax, the 10% final tax on FCDU's, the 20% final withholding tax or the applicable tax treaty rates on foreign loans, and the percentage tax on gross receipts, as the case may be. (BIR Ruling No. 118-96 dated November 4, 1996) 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)