Exemption from Income Tax and Consequently from Withholding Tax

September 21, 1990 BIR RULING NO. 185-90 88 (b) (8) (A) (iii) 227-83 185-90 Gentlemen : This refers to your letter dated July 16, 1990 stating that on September 12, 1988, you entered into an Investment Agreement ("Agreement") with the International Finance Corporation (IFC); that this agreement pertains to the investment made by IFC in Meralco's First Mortgage Bonds in the principal amount of Four Billion Yen (Y4,000,000,000.00); that among others, the agreement stipulates in Section 3.13, that you will be charged with the payment of any or all taxes due and collectible under the agreement; that pursuant thereto, you have been remitting to this Office the 20% withholding tax on interest payments to IFC; that you are, however, of the opinion that it is exempt from withholding tax pursuant to Section 28, paragraph (b)(8)(A)(iii) of the Tax Code; that IFC is an affiliate of the World Bank; that it is an international financing institution established by governments; that one of the signatories to the Articles of Agreement establishing it is the Government of the Republic of the Philippines (Republic Act No. 1604) which paid the amount of P332,000.00 as its subscription to the capital stock of IFC (Republic Act No. 1926; and that Section 9 of the said Article of Agreement provides that IFC, its assets, property, income and its operations and transactions shall be immune from all taxation. Based on the foregoing representations, you now request a ruling confirming your opinion that IFC is exempt from income tax and consequently from withholding tax on your interest payment in its favor. In reply, please be informed that pursuant to Section 28(b)(8)(A)(iii) of the Tax Code, as amended, income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by international or regional financing institutions established by government, among others, shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. Such being the case, and since IFC is an international financing institution established by government and in view of the immunity from taxation accorded IFC by member countries; your opinion to the effect that IFC is exempt from income tax and consequently, from the withholding tax provision of Section 50(c) of the Tax Code relative to your interest payments in its favor is hereby confirmed. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner