Interest Payments by PLDT on Loans from Italy Not Subject to Income Tax

January 28, 1998 BIR RULING NO. 004-98 28 (b) (8) (A)-000-00-004-98 Meer, Meer & Meer 9th Floor, PLDT Building Legaspi St., Makati City 1200 Attention: Atty . Antonio M . Meer Gentlemen : This refers to your letter dated August 13, 1997, requesting a ruling to the effect that the interest income receivable by Mediocredito Centrale S.P.A. (MCC) from your client the Philippine Long Distance Telephone Co. (PLDT), is exempt from Philippine tax under the RP-Italy Tax Treaty and the pertinent provisions of the National Internal Revenue Code, as amended. It is represented that PLDT has embarked on their Zero Backlog Program in line with their vision for accelerated telephone and telecommunications development in the Philippines; that the financing required for such expansion program will be partially provided by MCC, a financial institution fully owned by the Republic of Italy through the Ministry of Treasury, which was originally established by virtue of the Italian Law No. 949 of 1952 as a public body to promote the development of small and medium size Italian enterprises and assist the internationalisation of Italian companies through exports and direct foreign investment; that since its transformation into a joint stock company under Italian Law No. 489 of 1993, MCC acted as an industrial policy agency to implement various laws that provide incentives to businesses on behalf of the Italian Government, and as a commercially oriented development bank that offers companies innovative solutions to finance investment, exports, projects and equity needs by interacting with the banking system in Italy and abroad. LLphil In reply, please be informed that pursuant to Article 11, paragraphs 3 and 4 of the RP-Italy Tax Treaty reading: "Article 11 "3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State if; (a) the payer of the interest is the Government of that Contracting State or a local authority thereof; or the interest is paid to the Government of the other Contracting state or local authority thereof or any agency or instrumentality (including a financial institution) wholly owned by that other Contracting State or local authority thereof; or (b) the interest is paid to any other agency or instrumentality (including a financial institution) in relation to loans made in application of an agreement concluded between the Governments of the Contracting States. "4. The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises." interest arising in the Republic of the Philippines and paid to the Italian Government through its instrumentality, MCC, shall be exempt from Philippine tax. Furthermore, even under Section 28(b)(8)(A) of the Tax Code, as amended, income received by foreign governments, financing institutions owned, controlled or enjoying refinancing by foreign governments and international or regional financing institutions established by government from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines is exempt from income tax. Such being the case, the interest payments to be made by your client, PLDT, on the loans to be extended by the Republic of Italy through its instrumentality, MCC, shall not be subject to income tax and consequently, not also subject to the withholding tax provisions of Section 50(b) of the Tax Code, as amended. 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.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue