Request for Exemption from Payment of Withholding Tax on Interest of Canpotex Ltd.

February 19, 1986 BIR RULING NO. 016-86 24 (b) (15) 000-00 016-86 Gentlemen : This refers to your letter dated October 21, 1985 requesting exemption from the payment of withholding tax on interest on behalf of your client, CANPOTEX LIMITED ("CANPOTEX"). It is represented that Canpotex is a company organized and existing under the laws of Canada with office in Toronto, Canada; that it supplies muriate of potash to fertilizer companies in the Philippines, particularly Planters Products Inc. (PPI); that on or about June 9, 1984, CANPOTEX shipped to PPI 10,000 metric tons of muriate of potash (potassium chloride) for US $1,098,400.00; that the shipment was made on credit and payment was due on December 6, 1984; that interest at 18% p.a. would be charged on delayed payments; that PPI defaulted and the amount remains unpaid until the present. It is alleged that the credit in question is secured by the Export Development Corporation of Canada (EDC) and therefore interest to be paid by PPI to CANPOTEX is not taxable in the Philippines pursuant to Par. 7 (b), Article XI of the RP-Canada Tax Treaty, which provides as follows: "Interest arising in the Philippines and paid to a resident of Canada shall be taxable in Canada if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation." In reply, please be informed that for lack of legal basis, your request for exemption from withholding tax cannot be granted. It appears, from the documents submitted that what was insured by EDC is not the credit, but the shipment, such that in case of loss arising from, among others. "failure of the buyer to pay by the due date all or any part of the gross invoice value of the goods delivered to and accepted by the buyer", EDC shall pay 90% of such loss to CANPOTEX. Moreover, under Endorsement No. 1 attached to and forming part of EDC Global Comprehensive Policy No. GCI-03388 dated March 20, 1984, in the name of CANPOTEX LIMITED, it provides, among others, that with respect to goods shipped to buyers in the Philippines for sales made on terms of Unconfirmed Irrevocable Letter of Credit, any post-maturity interest which is computed for a period during which payment is in default was excluded from the gross invoice value of goods delivered to and accepted by the buyer. cdt Such being the case, the interest arising in the Philippines and to be paid and remitted by PPI to CANPOTEX is subject to the withholding tax but shall not exceed 15% of the gross amount thereof under Section 24 (b)(ii) of the Tax Code, as amended. (Par. 2, Article XI, RP-Canada Tax Treaty) Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner