Income Tax Exemption of Certain Foreign Entities for Investments Made in the Philippines

January 17, 2000 BIR RULING NO. 017-00 28 (B) (1) 000-00 017-2000 Standard Chartered Equitor Standard Chartered Bank P.O. Box 1220, Makati Central Post Office 6756 Ayala Avenue, Makati City Attention: Mr . Francisco S . Abacan Vice President Gentlemen : This refers to your letter dated March 2, 1999 requesting, on behalf of your custodial clients, namely: 1. The Chinese University of Hong Kong; 2. The Chinese University of Hong Kong Staff Superannuation Scheme (1983), 3. The Chinese University of Hong Kong Staff Superannuation Scheme (1995); and 4. The University of Hong Kong for exemption from the payment of income tax on the income derived from its investments made in the Philippines. The pertinent representations of the foregoing custodial clients are as follows: 1. The Chinese University of Hong Kong Records show that the Chinese University of Hong Kong is a statutory body incorporated pursuant to the Chinese University of Hong Kong Ordinance (Cap. 1109 of the Laws of Hong Kong) in 1963 for the furtherance of education; that it is recognized by the Inland Revenue Department of Hong Kong as a charitable institution within the meaning of Section 88 of the Inland Revenue Ordinance (Chap. 112 of the Laws of Hong Kong) and is thereby granted exemption from all taxes chargeable under the Ordinance; that the University is financed primarily by government grants and donations from various charitable organizations; that part of its funds in excess of short term needs is set aside for investment of securities in global capital markets; that income generated from the investments is solely used to finance the operation and academic activities of the University; that it generates income from its investments in the Philippines; that said income is utilized in furtherance or education and is applied purely for such purpose; and that no securities held in its name are in connection with any trade or business in the Philippines. cdll 2. The Chinese University of Hong Kong Staff Superannuation Scheme (1983) 3. The Chinese University of Hong Kong Staff Superannuation Scheme (1995) It is represented that the Chinese University of Hong Kong Staff Superannuation Schemes (1983) and (1995) were established by the University under separate trusts, to provide retirement benefits for the employees of the University in the form of a lump sum benefit payment upon termination of service, death or retirement; that the schemes have been registered under the Occupational Retirement Schemes Ordinance (Chap. 426 of the Laws of Hong Kong) as "recognized occupational retirement schemes"; that by virtue of such registration the schemes are exempted from profits tax under the Inland Revenue Ordinance with respect to their investment income in accordance with paragraph 23 and 24 of Hong Kong Inland Revenue Departmental Interpretation & Practice Notes No. 23; that the schemes are managed and administered by trustees, including an independent trustee as required by the Occupational Retirement Schemes Ordinance; that contributions received from the University and its employees are placed under the direction of the trustees for acquisition of securities comprising equities and bonds in global capital markets; that in order to provide for employees' superannuation benefits, income arising from the holding and disposal of investment assets is reinvested to achieve capital appreciation over the long term; that the investment income of the captioned schemes shall be used in fulfilling the objectives of the trust, namely, to provide superannuation benefits for members of the schemes (employees of the University); and that no securities held in the names of the captioned schemes are in connection with any trade or business in the Philippines. llcd 4. The University of Hong Kong It is represented that the University of Hong Kong was created by the University of Hong Kong Ordinance, Chapter 1053 of the Laws of Hong Kong in 1911, and is operated exclusively for charitable, scientific, literary, educational and other charitable purposes under the laws of Hong Kong; that the University is an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on; that the activities of the University have included, and will continue to include, the promotion of learning, arts, science, and research by conferring degrees and otherwise aiding in the development and formation of the character of students of all races, nationalities, and creeds; that the laws and customs applicable to the University do not permit any of its income or assets to be distributed to, or applied for the benefit of, a private person or non-charitable organization other than pursuant to the conduct of the University's charitable activities, or as payment of reasonable compensation for services rendered or as payment representing the fair market value of property which the University has purchased; that the University is equivalent to an exclusively charitable organization; that no securities held in the name of the University are in connection with any trade in the Philippines. In reply, please be informed that a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 33% (effective January 1, 1999); 32% (effective January 1, 2000 and thereafter) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums) annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d) [Section 28(B)(1) of the Tax Code of 1997]. Such being the case, we regret to inform you that your request cannot be granted for lack of legal basis. Income derived in the Philippines by your aforementioned clients shall be subject to income tax under Section 28 (B)(1) of the Tax Code of 1997 and consequently, to the final withholding tax imposed under Sec. 57(A) of the same Code, as implemented by Revenue Regulations. No. 2-98, as amended. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue