Exemption of Australian Trade Commission from Income Taxation

July 2, 1990 BIR RULING NO. 125-90 28 (b) (8) 000-00 125-90 Gentlemen : This refers to your letter dated February 23, 1990 stating that on August 10, 1988, Meralco entered into a Credit Agreement with the Australian Trade Commission, Trading as the Export Finance and Insurance Corporation (EFIC); that the Agreement pertains to the financing by EFIC of Meralco's purchase of a computer-based supervisory control and data acquisition system (SCAD) from Megadata Pty. Ltd., of New South Wales, Australia involving a credit facility of up to $4,729,300.00 which is secured by Meralco's First Mortgage Bonds; that the Agreement stipulates that Meralco will be charged with the payment of any or all taxes due and collectable under the said Agreement; that pursuant thereto, Meralco has been remitting to the BIR the 20% withholding tax on interest payments of EFIC; that the Australian Trade Commission Act of 1985 (Act) was enacted by the Queen, and the Senate and the House of Representatives of the Commonwealth of Australia on December 16, 1985 to establish the Australian Trade Commission (Commission) for the purpose of facilitating and promoting trade between Australian and foreign countries, and for related purposes, that said Act provides that the Commission is a body corporate clothed with the inherent powers of a corporation, and may conduct its business under the name of EFIC; that, accordingly, EFIC is not in itself a corporate body but merely a name permitted to be used by the Commission, such that dealings with the EFIC is in fact dealings with the Commission; and that under the Agreement, however, EFIC was referred to as a body corporate established by Australia under the Act of 1985. aisadc It is your contention that the apparent conflict between the Agreement and the Act, the latter, which is the law, shall prevail. Accordingly, EFIC is actually the Commission itself. Furthermore, you alleged that the Commission, having been established and organized by the State of Australia, is undoubtedly a government corporate which primarily gets money for its operational requirements from the coffers of the government of Australia. Thus, EFIC properly qualifies as a financing institution owned, controlled and enjoying refinancing from a foreign government. Accordingly, you request for a ruling on the exemption of Meralco from withholding tax on its interest payments to EFIC, pursuant to Section 28 paragraph (b)(8)(A) of the Tax Code, as amended. In reply, please be informed that based on your representations, it appears that under the Australian Trade Commission Act of 1985 the Australian Trade Commission was established as a body corporate vested with the inherent powers of a corporation (Section 7 paragraphs 1 & 2). The Act also provides that the Australian Trade Commission may conduct its business under the name "EFIC" (Section 25). Thus, notwithstanding the fact that under the Agreement between Meralco and the Australian Trade Commission EFIC was referred to as a body corporate, EFIC has no corporate existence separate and distinct from the Commission. Considering that the Commission is a government corporation established and organized by the State of Australia and which primarily gets money for its operational requirements from the coffers of the government of Australia, then it properly qualifies as a financing institution owned, controlled and enjoying refinancing from foreign governments. Pursuant to Section 28(b)(8)(A) of the Tax Code as amended, income received from their investments in loans, stocks, bonds of other domestic securities by foreign governments, financing institutions owned, controlled or enjoying refinancing from them, and international or regional financing institutions established by governments, shall not be included in gross income and shall be exempt from taxation . Since the Australian Trade Commission is a financing institution, owned, controlled and enjoying refinancing from the Australian government, and therefore exempt from income taxation, then it is also exempt from withholding tax provisions. Thus, Meralco is not under obligation to withhold the 20% withholding tax on its interest payments to the Commission. Very truly yours, (SGD.) JOSE U. ONG Commissioner