International Finance Corporation

January 9, 2009 BIR RULING [DA-(FIT-002) 006-09] S179; 199; DA247-05; 003-03 International Finance Corporation 2121 Pennsylvania Avenue, N. W. Washington D.C. 20433 United States of America Attention: Nina B. Shapiro Vice President, Finance and Treasurer Gentlemen : This refers to your letter dated July 19, 2007 requesting confirmation of your opinion that the International Finance Corporation (IFC) is not required to withhold any Philippine taxes on the interest payable on the Philippine Peso-denominated bonds it proposes to issue and that no documentary stamp tax is payable in the Philippines on the issuance and trading of such bonds. AETcSa It is represented that IFC is an international financing institution established in 1956 by different governments, with principal office at 2121 Pennsylvania Avenue, N.W., Washington D.C. 20433 United States of America; that IFC was established to further economic growth in its developing member countries by promoting private sector development; that IFC is a member of the World Bank Group, which also includes the World Bank, IDA and MIGA; that at present, the IFC has 179 member countries which collectively determine its policies and approve its investments; that the Philippines was one of the first signatories to the Articles of Agreement in 1957; and that IFC is a fully accredited diplomatic organization with the Department of Foreign Affairs of the Philippines. It is further represented that IFC regularly raises resources through issuance of bonds denominated in the local currency of various countries for sale in those jurisdictions (domestic issues) or in other jurisdictions (Euromarket or "offshore" issues); that relative thereto, it will issue a Philippine-peso denominated bond in the local market; that it is currently working with the Department of Finance and other government agencies, including the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission, to obtain the required approvals for the proposed bond issue; that the proposed transaction is for the issuance of bonds with a maturity of three to seven years and for an amount not greater than P5.0 billion (the Bonds); that the Bonds will likely be repaid in a single "bullet" installment and have a fixed or floating rate coupon; that it is anticipated that Standard Chartered Bank will lead the issue with additional leading financial institutions completing the underwriting syndicate; and that the issue would be targeted at both domestic and international institutional investors. In this connection, you request for our confirmation that: 1. IFC and its paying agents for the Bond issue are not required to withhold any tax on interest payments or discounts received by the holders of the IFC Bonds; 2. The issuance of the Bonds by IFC's is a transaction exempt from Philippine taxes including documentary stamp tax ("DST"). Consequently, IFC and the original purchasers of the Bonds are not required to pay DST; and 3. The secondary trading of the Bonds is not subject to DST. In reply, please be informed that: 1. IFC is accorded certain rights, immunities and privileges among which is the immunity from taxation as found in Article VI, Section 9 of its Articles of Agreement ratified by the Philippine Government in August 1957, which states: cCESaH "Section 9. Immunities from Taxation . "(a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty." IFC's immunity from liability for the collection or payment of any tax or duty provided under the Articles of Agreement effectively exempts IFC from the obligation to withhold any Philippine taxes due on interest income that the bondholders shall earn from the Bonds. This exemption from the obligation to withhold shall extend to paying agents acting for and on behalf of IFC with respect to the Bonds. The rationale for this is that the paying agent acts merely as an agent of IFC. Imposing the same withholding obligation on the paying agent would violate IFC's exemption from any obligation to withhold under Article VI, Section 9 of the Articles of Agreement. (BIR Ruling No. DA-247-05 dated June 8, 2005) 2. As stated in Article VI, Section 9 of the Articles of Agreement, "the Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties." This has to be interpreted to mean that transaction that may be made by IFC is also exempt from taxation imposed under the Tax Code. Consequently, whoever may be the party involved in the transaction entered by IFC, no DST can be imposed thereon. Thus, where IFC is a party to a transaction, the transaction itself is exempt from DST. Therefore, the provision of Section 173 of the Tax Code which shifts to the other party the payment of DST shall not apply as there is no instance that DST may be imposed on any transaction entered into by IFC pursuant to the aforementioned Article VI, Section 9 of the Articles of Agreement. (BIR Ruling No. DA-247-05 dated June 8, 2005) In view of the foregoing, the issuance of bonds by IFC shall be exempt from the DST imposed under Section 179 of the Tax Code, as amended by R.A. No. 9243. 3. The assignment of the Bonds in the secondary market is not subject to DST. Section 199 of the Tax Code, as amended by Republic Act No. 9243, exempts "fixed income and other securities traded in the secondary market or through an exchange" from DST. Moreover, as consistently held by this Office, issuance of bonds in the secondary market is no longer subject to DST. The transfer of the Bonds in bearer form in the secondary market by way of simple delivery to the buyer is not subject to DST unless the transfer of the instrument carries with it a renewal and issuance of new instruments in the name of the transferee to replace the old ones (BIR Ruling No. 003-03 dated March 27, 2003; 026-02 dated June 27, 2002; BIR Ruling No. 050-01 dated October 29, 2001). The provision of Section 198 of the Tax Code of 1997, as amended, which imposes DST on assignments and renewals of certain instruments, to wit: HTSaEC "SEC. 198. Stamp Tax on Assignments and Renewals of Certain Instruments . Upon each and every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same time as that imposed on the original instrument." does not apply in secondary trading of bonds since the financial market (primary or secondary) does not change the tenor of bonds originally issued. The investing public who made the indirect investment in the secondary market merely substitute the original lender. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service