Tax Exemption of Interest on Bonds Paid to Foreign Bondholders

November 18, 1996 BIR RULING NO. 121-96 50 (a); 88; 213-88 Pambansang Korporasyon sa Elektrisidad (National Power Corporation) Cor. Quezon Avenue & Agham Road Diliman, Quezon City Attention: Mr. Alberto L. Pangcog VP-General Counsel This refers to your letter dated August 20, 1996 requesting confirmation of your opinion that the National Power Corporation's (NPC's) payment of both principal and interest to foreign bondholders on bonds it proposed to issue in the United States are not subject to any withholding tax in the Philippines. ISDHcT It is represented that NPC, a government-owned and controlled corporation duly organized and existing under and by virtue of Republic Act No. 6395, as amended, proposes to issue U.S. SEC-registered bonds in the U.S.A., which will be publicly offered in major financial centers in the U.S.A., to raise funds needed for various projects in connection with its enormous task of generating and transmitting power in the Philippines; and that the Republic of the Philippines will unconditionally guarantee the payment of both principal and interest of the said NPC bonds. In reply, please be informed that we are adopting the opinion of the Secretary of Justice dated July 11, 1994 pertinent portion of which states: xxx xxx xxx "7. All payments by the Guarantor in respect of interest on the Bonds and any other amounts due and payable by the Guarantor under the Guarantee may be made without withholding or deduction for or on account of any taxes, duties, assessments or governmental charges in the Philippines." ICcaST In other words, we hereby confirm your opinion that interest on bonds paid to foreign bondholders in United States and other foreign currencies regardless of whether or not a tax treaty exists between the Philippines and such other countries shall be exempt from income tax and consequently from withholding tax, in accordance with Section 8 (b), R.A. 6975, which reads: "The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Corporation, paid from the proceeds of any loan, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed in the Republic of the Philippines, or any of the agencies and political subdivisions." It should be noted that in the case of Maceda versus Macaraig, Jr. , Vol. 223 SCRA p. 217, the Supreme Court ruled that the tax exemption privilege of the National Power Corporation, more particularly on its interest payments to the foreign bondholders are exempt from income tax and consequently from withholding tax. Although, our existing tax treaties with other countries also provide for similar exemption, the specific provision that should govern the income tax exemption on interest payments to foreign bondholders should be the tax exemption clause provided under NPC's charter. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue