Asian Development Bank

December 16, 2008 BIR RULING [DA-(FIT-015) 538-08] DA 247-05 Asian Development Bank 6 ADB Avenue Mandaluyong City Attention: Fong Chin Choon Assistant General Counsel Gentlemen : This refers to your letter dated February 22, 2008 stating that the Asian Development Bank (ADB) proposes to issue and sell from time to time peso-denominated notes (PHP MTNs) in the Philippines under its Asian Currency Note Programme (the Programme) subject to the approval of the Secretary of Finance and other relevant Philippine government authorities; that the Programme is dedicated to issuances of medium term notes (MTNs) in regional currencies, which allows regional and global issuers to tap bond markets in the region, responds to the calls by regulators for issuer and investor diversification, and contributes to the deepening of the bond markets in the region; that the Programme creates a single issuance platform in the form of common set of documents governed under English law, and has significant efficiency and transaction cost advantages; and that the regional currencies that are already included under the Programme are the Hong Kong dollar, Malaysian ringgit and Singapore dollar. Based on the foregoing representations, you now request confirmation of your opinion that 1. ADB and its paying agents for any issue of PHP MTNs are not required to withhold any tax on interest payments or discounts received by the holders of PHP MTNs; 2. ADB and the original purchases of PHP MTNs are not required to pay documentary stamp tax (DST) in respect of any issue of PHP MTNs, and the secondary trading of PHP MTNs is not subject to DST; 3. Full tax exemptions will apply to all of ADB's investment income in ROP bonds and treasury bills, banking instruments (all available instruments such as deposits, bilateral lending, and money market instruments, etc.) and repo and reverse repo transactions with the Bangko Sentral ng Pilipinas (BSP) and commercial banks in which ADB invests proceeds of PHP MTNs. In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. DA 247-05 dated June 8, 2005 as follows: "ADB is accorded certain rights, immunities and privileges among which is the immunity from taxation as found in Article 56(1) of its Charter which provides that: "The Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. The bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty". Thus, apart from its immunity from taxes, the Charter provides for ADB's exemption from the obligation to withhold taxes. cDCEHa In view of the foregoing exemption under Article 56(1) of the ADB Charter, the ADB should not be required to withhold any tax 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 ADB with respect to the Bonds. The rationale for this is that the paying agent acts merely as an agent of ADB. Imposing the same withholding obligation on the paying agent would violate ADB's exemption from any obligation to withhold under Article 56(1) of the ADB Charter. As stated in Article 56(1) of the ADB Charter, "the Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties". This has to be interpreted to mean that transaction that may be made by ADB is also exempt from taxation imposed under the Tax Code. Consequently, whoever may be the party involved in the transaction entered by ADB, no DST can be imposed thereof. Thus, where ADB 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 ADB pursuant to the aforementioned Section 56(1) of the ADB Charter. In view of the foregoing, the issuance of bonds by ADB shall be exempt from the DST imposed under Section 180 of the Tax Code, as amended by R.A. No. 9243. The 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 or issuance of new instruments in the name of the transferee to replace the old ones (BIR Ruling No. 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. xxx xxx xxx . . . 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." Prescinding from the foregoing, it is undisputed that any transactions made by ADB are exempt from taxation as well as from any obligation for the payment, withholding or collection of any tax. This exemption from the obligation to withhold shall likewise extend to its paying agents acting for and on behalf of ADB. WHEREFORE, in view of the foregoing, this Office holds that 1. ADB and its paying agents for any issue of PHP MTNs are not required to withhold any tax on interest payments or discounts received by the holders of PHP MTNs. 2. ADB and the original purchasers of PHP MTNs are not required to pay DST in respect of any issue of PHP MTNs, and the secondary trading of PHP MTNs is likewise not subject to DST. 3. Finally, full exemptions from its investment income in ROP Bonds and treasury bills, banking instruments (all available instruments such as deposits, bilateral lending, and money market instruments, etc.) and repo and reverse repo transactions with the BSP and commercial banks in which ADB invests proceeds of PHP MTNs. 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. aTCADc Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service