Interest from Loans Obtained by SCP from Local And Foreign Banks/Financial Institutions Exempt from All National Internal Revenue Taxes

November 4, 1996 BIR RULING NO. 118-96 R.A. 7103 000-00 118-96 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . S . U . Salvador, Jr . Tax Division This refers to your letter dated June 19, 1996, requesting on behalf of your client, Steel Corporation of the Philippines (SCP), for a ruling to confirm your opinion that interest from loans obtained by SCP from local and foreign banks/financial institutions are exempt from all national internal revenue taxes, including income tax and gross receipts tax, pursuant to Section 6(e) of Republic Act 7103, otherwise known as the Iron and Steel Industry Act. cdta It is represented that SCP is a domestic corporation duly organized and existing under Philippine laws; that it was registered with the Securities and Exchange Commission on October 3, 1994 and with the Board of Investments as a new producer of flat products on a pioneer status effective December 18, 1995; that it is a holder of Certificate of Eligibility under R.A.. 7103; that to partially finance the construction of its plant, SCP is obtaining peso denominated loans from local commercial banks, i.e . Rizal Commercial Banking Corporation (RCBC), Allied Banking Corporation (ABC), China Banking Corporation (CBC), Equitable Banking Corporation (EBC), Land Bank of the Philippines (LBP) and Citytrust Banking Corporation (CTBC) under DBPs JEXIM III program, foreign currency denominated debts from local commercial banks (CBC, LBP, CTBC and EBC), and foreign currency denominated debt from Asian Finance and Investment Corporation (AFIC), a financial institution duly organized under the laws of Singapore; and that all debts have a term of seven (7) years including a three (3)-year grace period. In reply, please be informed that Section 6(e) of R.A.. 7103 otherwise known as the Iron and Steel Industry Act provides as follows: "Section 6. . . . (e) Other loans The certified enterprise shall be authorized to contract; subject to the prior approval of the Central Bank of the Philippines, such loans, credits and indebtedness, from time to time and in any convertible foreign currency or capital goods, from foreign private financial institutions or fund sources as may be necessary to undertake the manufacturing activity described in Section 5(b) above. The Central Bank of the Philippines shall give priority to the applications made by certified enterprises to foreign currency loans, debt asset and debt-equity conversion and such other transaction as may receive the approval of the Central Bank of the Philippines. The government shall likewise encourage private financial institutions, whether domestic or foreign, to extend loans for equity investments of Philippine nationals in a certified enterprise. The interest income from loans with maturity of five (5) years or more extended by financial institutions shall be exempt from all national internal revenue taxes ." (Emphasis ours) Based on the foregoing, and since Steel Corporation of the Philippines is a holder of Certificate of Eligibility under the provisions of R.A.. 7103, interest income from loans with maturity of five (5) years or more extended by domestic and foreign financial institutions to it shall be exempt from all national internal revenue taxes. Accordingly, we confirm your opinion, that: 1. Interest income derived by RCBC, ABC, CBC, LBP, CTBC and EBC from Philippine currency loans under DBP's JEXIM III program with maturity of more than five (5) years, granted to Steel Corporation of the Philippines shall be exempt from the 35% corporate income tax imposed under Sections 24 (a) (1) and 25 (a) (1) of the Tax Code, as well as the percentage tax on gross receipts of banks and non-bank financial intermediaries under Section 119 of the Tax Code, as amended; 2. Interest income derived by CBC, LBP, CTBC and EBC from foreign currency loans granted under the Expanded Foreign Currency Deposit system, with maturity of more than five (5) years, granted to Steel Corporation of the Philippines shall be exempt from the 10% final tax imposed under Sections 24(e) (3) and 25(a) (6) (B) of the Tax Code, as amended; and 3. Interest income derived by AFIC from foreign currency denominated loans granted to Steel Corporation of the Philippines shall be exempt from the 20% final withholding tax on foreign loans imposed under Section 25(b) (5) (A) of the Tax Code or the applicable rate imposable under the provisions of the RP-Singapore Tax Treaty. Consequently, since the said interest income is not subject to Philippine tax, Steel Corporation of the Philippines is not required to withhold the tax on said income. 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 . cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue