Tax Consequence of Payment of Income in Connection with Nobel Phil.'s Foreign Loan Secured by Guaranty

August 28, 1985 BIR RULING NO. 147-85 29-c 000-00 147-85 Gentlemen : This refers to your letter dated November 8, 1984 requesting a ruling on the taxation aspect of income in the form of interest, commissions, guarantee fees, commitment fees and agent fees which Nobel Philippines Inc. (NPI) is going to pay in connection with its foreign loan secured by guaranty. It is represented that NPI contracted a US Dollars 20,677,100 loan made available by the Export Credits Guarantee Department (ECGD) of Her Britanic Majesty's Government of England through the facility of two foreign banks namely: Midland Bank Limited (MBL) ($15,507,825 & Scandinavian Bank Limited (SBL) ($5,169,275); that the loan is payable through the agent/banker of ECGD Antony Gibbs Holding Limited and the two foreign banks MBL & SBL in 14 semi-annual installments with 7-1/2 interest p.a.; that the loan agreement provide for the joint & solidary guaranty of Private Investment Company for Asia (PICA) of Panama (60%) and Nitro Nobel AB (NNAB) of Sweden (40%) on all financial obligations of NPI; and that ECGD is an agency of the Government of the U.K. which is empowered under the Export Guarantee Act to refinance loans granted to finance export of the products and services of entities of the U.K. which in this case, ECGD is refinancing the loan granted to NPI. cdt In reply, please be informed that as can be gleaned from the Loan Agreement, the US$20,677,100 loan contracted by NPI was actually extended by MBL in the amount of US$15,507,825 and by SBL in the amount of US$5,169,275. Thus, the actual lenders are NBL & SBL, ECGD merely ensured that the loan facility be made available to NPI. Section 24(b)(ii) of the NIRC, as amended, provides that interest on foreign loans is subject to 15% tax. Article 10(2) or the RP-UK Tax Treaty also provides that the tax on interest income derived and beneficially owned by a UK resident from the Philippines shall not exceed 15% of the gross amount of the interest. 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." does not apply in this instant case because ECGD is merely a facilitator of the loan. At most it only guarantees that the loan will be made available to the borrower. It does not guarantee that the loan will be repaid in case of default of the borrower. With respect to your second question "whether the tax exemption/privilege shall, by operation of law, likewise accrue in favor of PICA and NNAB being the subrogees, so that interest and other income payments we may remit to them (aside from the principal) shall continue to enjoy exemption from withholding tax," the same is answered in the negative because (1) the tax exemption privilege upon which the question is based does not exist, and (2) an exemption privileges conferred by law upon a person can not be assigned nor transferred to a non-exempt person. Wherefore, the interest income which NPI will pay to the actual lenders, MBL & SBL for the US$20,677,100 loan, is subject to 15% withholding tax pursuant to Section 24, (b)(ii) of the NIRC, as amended. The commissions, guarantee fees, commitment fees and agent fees paid by NPI are incidental income arising from, and form part of the loan. They are considered under the RP-UK Tax Treaty as income assimilated to income from money lent" (Art. 10(5) and are thus likewise subject to 15% withholding tax.) cdta Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner