15% Withholding Tax on Interest Income Payable to the Actual Lenders

April 6, 1987 BIR RULING NO. 097-87 29 (b) 000-00 097-87 Gentlemen : This refers to your letters dated December 3, 1985, July 24 and November 3, 1986 requesting reconsideration of BIR Ruling No. 29-c-000-00-147-85 dated August 28, 1985 to the effect that the interest income which Nobel Philippines, Inc. (NPI) will pay to the actual lenders, Midland Bank Limited (MBL) and Scandinavian Bank Limited (SBL) under a Loan Agreement executed by them, is subject to the 15% withholding tax pursuant to Section 24(b)(ii) of the NIRC, as amended; and that the commissions, guarantee fees, commitment fees and agent fees paid by NPI are incidental income arising from, and forming part of the loan which are considered under the RP-UK Tax Treaty as income assimilated to income from money lent subject to the 15% withholding tax. cdta In reply thereto, I have the honor to inform you that after a re-study, this Office finds the said request to be meritorious and hereby grants the same. From the evidence submitted, it appears that the Export Credits Guarantee Department (ECGC), an agency of the Government of the United Kingdom under the Export Guarantees and Overseas Investment Act of 1978 has issued its guarantee in respect of the loan agreement made between MBL and SBL and NPI in the sense that ECGD guarantees that the loan will be repaid in case of default by the borrower. Hence, paragraph 4(b) of Article 10, RP-UK Tax Treaty which provides: "(4) Notwithstanding the provisions of paragraphs (2) and (3) of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: (a) . . . (b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States." applies in this case. With regard to the commissions, guarantee fees, commitment fees and agent fees paid by NPI, you have satisfactorily shown that said fees were paid not only to the lenders but also to other parties for services performed outside the Philippines. Consequently, said fees constitute income from sources without the Philippines and, therefore, not subject to Philippines income tax. This revokes BIR Ruling No. 29-c-000-00-147-85 dated August 28, 1985. Very truly yours, BIENVENIDO A. TAN, JR. Commissioner By: (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner