BIR Ruling No. 089-65

August 12, 1965 BIR RULING NO. 089-65 Capt. Hilario M. Ruiz Chief of Naval Logistics Philippine Navy Headquarters Roxas Boulevard, Manila S i r : This refers to your letter dated April 14, 1965 requesting that the Philippine Navy be exempt from all taxes, including the 30% withholding tax, in connection with its purchase and importation of two hydrofoil boats, in accordance with that provision of Republic Act No. 3100 which states that "all purchases made by the Armed Forces of the Philippines exclusively for military purposes . . . shall be free of taxes, fees and levies, including the dollar margin fee". It appears that the Philippine Navy entered into a contract with Shipyard Leopoldo Rodriguez of Messina, Italy (hereinafter referred to as the Shipyard), for the purchase of two (2) hydrofoil boats; that the Philippine Navy has applied with the PNB a revolving letter of credit in the sum of US $452,718.75 representing 75% of the cost of the 2 hydrofoil boats, including interest; that payments are to be remitted to the Shipyard in five (5) semi-annual installments beginning on or about October 15, 1965 and ending on or about October 15, 1967; and that the PNB has deferred action on the Philippine Navy's application for a revolving letter of credit until such time when the Philippine Navy shall have executed a Deed of Undertaking whereby it assumes all risks as well as all taxes, duties and other levies now applicable or which may be applicable during the currency of the deferred letter of credit, including the 30% withholding tax on the interest portion of the deferred letter of credit, in the sum of P47,174.25, more or less. In reply, I have the honor to inform you that by virtue of the Special Provision of Republic Act No. 3100, similar provision of which has been incorporated in subsequent appropriation acts, all purchases made by the Armed Forces of the Philippines directly or thru indentors exclusively for military purposes are free of taxes, fees and levies. The only issue therefore for us to resolve is whether or not the interest portion of the deferred letter of credit is subject to the 30% withholding income tax. The interests income which is subject to withholding tax under the provisions of Section 54 in relation to Section 53, both of the Tax Code consists of interest income derived by non-resident foreign corporations from sources within the Philippines. As the interest portion of the deferred letter of credit represents the interest earnings of the Shipyard on deferred payments, such earnings are subject to the 30% withholding income tax. casia Very truly yours, (SGD.) BENJAMIN N. TABIOS Acting Commissioner of Internal Revenue