Bear Stearns Securities Corp. Entitled to Tax Relief Under RP-US Tax Treaty on Interest Received on Certain Securities

May 28, 1998 BIR RULING NO. 079-98 RP-US Tax Treaty 000-00 79-98 Diaz, Murillo, Dalupan Certified Public Accountants 3F Don Jacinto Building De la Rosa corner Salcedo Sts., Legaspi Village, Makati City Attention: Mr . Moises R . Villanueva Tax Partner Gentlemen : This refers to your letter dated August 1, 1996 stating that your client, Bear Stearns Securities Corporation (BSSC), is a corporation duly organized and existing under the laws of the United States; that BSSC does not conduct business in the Philippines through a permanent establishment; that it plans to begin trading privately placed fixed income securities issued by Philippine companies and publicly traded fixed income securities issued by the Philippine government; that BSSC plans to buy and sell commercial papers and promissory notes issued by Philippine corporate entities and government issued Treasury Bills and Treasury Notes; that under current practices, the withholding tax on interest paid on the abovementioned securities is applied upon issuance on the amount of the discount attributable to the term of the instrument; and that the statutory withholding tax on said instruments is 20% under the National Internal Revenue Code. Based on the foregoing, you are requesting in advance a ruling to the effect that BSSC is entitled to tax relief under the RP-US Tax Treaty on interest received on the following types of securities and the rates applicable to such securities: Type of Security Rate Treasury Bills 10% Treasury Notes 10% Long Term Commercial Paper 15% Short Term Commercial Paper 15% Promissory Notes 15% In reply, please be informed that Article 12 of the RP-US Tax Treaty, provides, viz: "Article 12 "INTEREST "1) Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. "2) Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. "3) Interest derived by a resident of one of the Contracting State from sources within the other Contracting State with respect to the public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. "4) Notwithstanding paragraphs (1), (2) and 3), interest derived by "a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States, and such other institution of either Contracting States as the competent authorities of both Contracting States may determine by mutual agreement), or "b) As resident of one of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof, shall be exempt from tax by the other Contracting State. LLphil "5) Paragraphs (2), (3) and (4) shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. "6) . . . "7) . . . Such being the case, we hereby confirm your opinion that interest derived by a resident of the United States from public issues of Treasury Bills and Treasury Notes shall be subject to a tax of 10% of the gross amount of such interest; whereas, interest derived by a president of the United States from public issues of Long Term Commercial Paper, Short Term Commercial Paper, and Promissory Notes shall be subject to a tax of 15%, pursuant to paragraphs 3 and 2, respectively, of Article 12 of the RP-US Tax Treaty. prcd 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