Certificate of Tax Exemption from Withholding Tax on Interest on Import Credit Facilities Extended to PITC

February 8, 1985 BIR RULING NO. 015-85 29-c 000-00 015-85 Gentlemen : This refers to your letter dated July 31, 1984 requesting a certificate of tax exemption from withholding tax on interest on the various import credit facilities extended to your client Philippine International Trading Corporation (PITC) by 1) First National Bank of Chicago (FNBC), 2) the Crocker National Bank (CROCKER), 3) the Pacific Overseas Finance Corporation (POFC), and 4) The Westpac Banking Corporation (WESTPAC). It is represented that PITC is a government-owned and controlled corporation; that foremost among its purposes is to engage in or handle for Philippine and third country enterprises through methods, systems, devices and facilities intended to achieve economies of scale and better terms of trade for Philippine business, both foreign procurement as well as foreign marketing and distribution; that it is empowered to borrow, raise, or obtain funds and/or to arrange financing or equipment credit or any kind of financial or material assistance for its own account or its clients from any financial or lending institutions, local or foreign; and that it negotiated for and secured foreign loans from the following foreign banks: Bank Amount of Facility Insurer 1. First National US$50,000,000 U.S. Eximbank/ Bank of Chicago FCTA (FNBC) 2. Crocker/POFC US$45,000,000 do 3. do US$40,000,000 do 4. Westpac Banking AUD$50,000,000 Export Finance (WESTPAC) and Insurance Corporation (EFIC) It is further represented that FNBC, Crocker and POFC are American corporations and WESTPAC is an Australian corporation; that Eximbank which insured the loans extended by FNBC, Crocker and POFC is an instrumentality of the Government of the United States; and that EFIC which insured the loan extended by WESTPAC is likewise an instrumentality of the Government of Australia. In reply, please be informed that Article 12(4)(b) of the RP-US Tax Treaty provides that interest derived by a resident of the United States with respect to debt obligations guaranteed or insured by the United States or an instrumentality thereof shall be exempt from tax by the Philippines. Thus the interest income of FNBC from its loan of US$50,000,000, and by CROCKER/Pacific Overseas Finance Corporation for their loans of US$45,000,000 and US$40,000,000 are exempt from withholding tax. cd With respect to the credit facility extended by WESTPAC, the interest income arising therefrom is subject to Article 11 (2) of the RP-Australia Tax Treaty which provides: "(2) Such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest." Paragraph 7 of the same article which provides: "(7) Interest derived by the Government of a Contracting State, or by any other body exercising governmental functions in, or in a part of, a Contracting State, or by a bank performing central banking functions in a Contracting State, shall be exempt from tax in the other Contracting State." is not applicable because the recipient of the income is not the Australian Government nor EFIC which insured the loan but of WESTPAC which is a private company. Wherefore the interest income of Westpac Banking Corporation from the AUD$50,000,000 credit facility it extended to Philippine International Trading Corporation is subject to 15% withholding tax pursuant to Section 24(b)(ii) of the Tax Code. cd Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner