The World Bank

February 5, 2009 BIR RULING [DA-(FIT-004) 053-09] 173; 198; #3-2003; DA-247-2005 The World Bank World Bank Office Manila 23rd Floor, The Taipan Place, Emerald Avenue Ortigas Center, Pasig City Attention: Mr. Heike Reichelt Acting Director Capital Markets Department Gentlemen : This refers to your letter dated August 9, 2007 requesting for a ruling on the taxability of bonds to be issued by the International Bank for Reconstruction and Development (the "World Bank") in the Philippines. IaDTES As represented, the World Bank is an international organization established in 1945 pursuant to its Articles of Agreement ("Articles") and owned by its member countries. The World Bank's main goal is reducing poverty by promoting sustainable economic development. The Philippines was one of the founding members of the World Bank, having joined the World Bank on December 27, 1945. Article VII, Section 9 (a) of the Articles, provides to wit: "SEC. 9. Immunities from Taxation . (a) The Bank, 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 Bank shall also be immune from liability for the collection or payment of any tax or duty." Under Article VII, Section 10 ("Application of Article"), each member of the World Bank commits itself to recognize and give effect to all the immunities set forth in Article VII in domestic law. Based on the foregoing immunities contained in the Articles, the World Bank does not withhold taxes on payments to investors on any of its bond issues nor does it pay stamp taxes or any similar taxes or duties with respect to any of its bond transactions. Furthermore, under general principles of agency law, the World Bank takes the position that its immunities against the collection of taxes also extend to paying agents acting on its behalf. In order to obtain cost effective funding in the Philippines, the proceeds of which would be used for development projects in your member countries, including the Philippines, you now request for a ruling on the following: (1) the World Bank, and its paying agents with respect to the Bonds, shall not be required to withhold or otherwise collect any tax with respect to any payments on the Bonds; ICHcTD (2) the issuance of the Bonds shall be exempt from documentary stamp tax (DST), and consequently the World Bank and the purchasers of the Bonds shall not be required to pay DST; and (3) the secondary trading of the Bonds shall be exempt from DST. We reply, as follows: 1. Pursuant to Article VII, Section 9 (a) of the World Bank's Articles of Agreement, which provides, to wit: Article VII, Section 9 (a) of the Articles, provides to wit: "SEC. 9. Immunities from Taxation . (a) The Bank, 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 Bank shall also be immune from liability for the collection or payment of any tax or duty." the assets, property, income of World Bank and its operations and transactions authorized by the Agreement, shall be immune from all taxation and from all customs duties and the same shall also be immune from liability for the collection or payment of any tax or duty. Thus, apart from its immunity from taxes, the Articles of Agreement likewise provides for World Bank's exemption from the obligation to withhold taxes. In view of the foregoing, it is clear that World Bank's immunity from liability for the collection or payment of any tax or duty effectively exempts World Bank from the obligation to withhold any Philippine taxes due on any payments relative to the Bonds. This exemption from the obligation to withhold shall extend to the paying agents acting for and on behalf of World Bank with respect to the Bonds. The rationale for this is that the paying agent acts merely as an agent of World Bank. Imposing the same withholding obligation on the paying agent would violate World Bank's exemption from any obligation to withhold under the aforementioned Articles of Agreement. 2. As stated in Article VII, Section 9 of the World Bank's Articles of Agreement, "the Bank, its assets, property, income and its operations and transactions authorized by the Agreement, shall be immune from all taxation and from all customs duties." This has to be interpreted to mean that an authorized transaction that may be made by World Bank is also exempt from taxation imposed under the Tax Code. Consequently, whoever may be the party involved in the transaction entered by World Bank, no DST can be imposed thereof. EcHIDT Thus, where the World Bank 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 World Bank pursuant to the aforementioned Article VII, Section 9 of the World Bank's Articles of Agreement. (BIR Ruling No. DA-247-05 dated June 8, 2005) In view of the foregoing, the issuance of bonds by World Bank 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: "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 substitutes 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, then this ruling shall be considered as null and void. ICacDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service