Exemption of Foreign Loan from Final Withholding Tax

May 29, 1989 BIR RULING NO. 113-89 25 (b) (5) 022-86 113-89 Gentlemen : This refers to your letter dated November 11, 1988 requesting clarification on whether the interest paid by Philippine Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE) on the foreign loan extended by the Export Development Corporation of Canada (EDC) to Marfishing Company, Inc. (MFCI) is exempt from tax under the RP-Canada Tax Treaty. aisadc It is represented that PHILGUARANTEE, a government-owned and controlled corporation, entered into a guarantee agreement with EDC to guarantee the loan extended by the latter to MFCI; that in accordance with the provisions of this guarantee agreement, PHILGUARANTEE made advances for the account of MFCI as a consequence of MFCI's default in the payment of its maturing obligations; that part of these advances are interest amortizations which under Section 24 [b] [ii] (now Section 25, (b)(5) in relation to Section 50) of the National Internal Revenue Code and Article XI, Paragraph 2 of the RP-Canada Tax Treaty, are subject to 15% (now 20%) final withholding tax; that the said withholding taxes were also advanced by PHILGUARANTEE and remitted to the Bureau of Internal Revenue on March 31, 1987. In reply, please be informed that under Article XI, Paragraph 7, subparagraph (b) of the RP-Canada Tax Treaty, which provides as follows: "(b) Interest arising in the Philippines and paid to a resident of Canada shall be taxable only in Canada, if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Export Development Corporation." the interest arising in the Philippines and to be paid by Marfishing Company, Inc. on foreign loan extended by Export Development Corporation of Canada, which in this case was advanced by the Philippine Export and Foreign Loan Guarantee Corporation, is taxable only in Canada, and consequently, the same is not subject to the final withholding tax imposed by the aforecited Section 25, paragraph (b)(5) of the National Internal Revenue Code. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner