Interest income derived by Italian Residents from Notes and Other Government Securities Issued by the Philippine Government such as CB Bills and Notes, and Treasury Bills and Notes Exempt from Philippine Income Tax and Consequently from Philippine Withholding Tax pursuant to the RP-Italy Tax Treaty

February 21, 1996 BIR RULING NO. 020-96 Sec. 25 (b) (5) (a) 000-00 020-96 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . J . A . Osana Gentlemen : This refers to your letter dated November 20, 1995, requesting for a ruling to confirm your opinion that interest income derived by Italian residents from Notes and other government securities issued by the Philippine government such as CB Bills and Notes, and Treasury Bills and Notes (including Philippine Government Bonds, Floating Rate Notes with interest coupons paid on a quarterly basis) are exempt from Philippine income tax and consequently from Philippine withholding tax pursuant to Article 11(3) of the RP-Italy Tax Treaty. LLcd It is represented that your client are corporations organized and existing under the laws of Italy and are not engaged in trade or business in the Philippines; that your clients together with other residents of Italy shall acquire Notes and other government securities all issued by the Philippine government which shall either be held by themselves up to maturity or by other Italian resident investors who may subsequently sell the same to other Italian residents who shall also hold these notes and/or securities until their maturity; and that the holders shall derive interest income on these Philippine issued notes and other government securities. In reply, please be informed that Article 11 of the RP-Italy Tax Treaty provides as follows: "Article 11 "INTEREST "1. Interest arising in a Contracting State paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the amount of the interest in respect of public issues of bonds, debentures or similar obligations and paid by a resident of one Contracting State to a resident of the other Contracting State and 15% of the amount of interest in all other cases. The competent authorities of the Contracting State shall by mutual agreement settle the mode of application of this agreement. "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 b. 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 c. 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 State." (Emphasis supplied) It is clear from the aforequoted provisions of the RP-Italy Tax Treaty that interest income arising from the Philippines shall be exempt from Philippine income tax if the payor of the interest is the government of the Philippines or a local authority thereof. Considering that the payor of interest derived from Philippine government's issued Notes and other securities such as CB Bills and Notes and Treasury Bills and Notes (including Philippine Government Bonds, Floating Rate Notes with interest coupons paid on a quarterly basis) is the Philippine government, interest income that may be derived by resident/s of Italy from said Philippine government's issued Notes and securities shall not be subject to Philippine income tax under Section 25(b) (5) (a) of the Tax Code, as amended, but are subject to tax only in Italy. 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 avoid. cdll Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue