Tax Exemption on Interests Paid to Foreign Creditor Banks

May 25, 1988 BIR RULING NO. 213-88 25 (b) (5) 000-00 213-88 Gentlemen : This refers to your letter dated September 23, 1987 stating that to finance your projects mandated by P.D. No. 334, you obtained a loan of U.S. $64 million from a consortium of foreign banks led by Chase Manhattan Asia Ltd. under Loan Agreement dated August 24, 1978 and Yen 12.5 billion loan from a syndicate of Japanese banks led by the Industrial Bank of Japan under your agreement dated May 15, 1979; that both loans were authorized and guaranteed by the Government of the Republic of the Philippines; that in October 1983, the Central Bank suspended all foreign exchange payments of the Philippines following the massive outflow of foreign exchange from the country, as a result of which the aforesaid loan agreements were restructured under a restructuring agreement dated January 10, 1986; and that based on the tax exemption provisions of P.D. No. 334 and in the light of P.D. Nos. 1931 and 1955 and Executive Order No. 93, you request confirmation of the continuing exemption from taxes on interest income paid by you to the lending banks. In reply, please be informed that Section 13 of P.D. No. 334 reads as follows: "SEC. 13. Loans . The company, as well as any affiliate corporation in which it holds, owns and/or controls by itself or jointly with one or more government owned or controlled corporations at least seventy-five percent (75%) of the issued and outstanding shares of stock entitled to vote, when specifically authorized by the President of the Philippines is hereby authorized to contract loans , credits, in any convertible foreign currency or capital goods, and indebtedness from time to time from foreign governments, or any international financial institutions or fund sources, or any other entities, on such terms and conditions it shall deem appropriate for the accomplishment of its purposes and to enter into and execute agreements and other documents specifying such terms and conditions. "The Republic of the Philippines, through the President of the Philippines or his duly authorized representative , may guarantee, absolutely and unconditionally, as primary obligor and not as surely merely, the payment of the loans, credits and indebtedness secured by the Company or any of its affiliate corporations, as provided above, which may be over and above the amount which the President of the Philippines in authorized to guarantee under Republic Act Numbered Sixty One Hundred Forty-two, as amended, as well as the performance of all or any of the obligations undertaken by the company or its affiliate corporations in the territory of the Republic of the Philippines pursuant to loan agreements entered into with foreign government or any international financial institutions of fund sources. " The loans, credits and indebtedness contracted under this sub-section and the payment of the principal, interest and other charges thereon , as well as the importation of the machinery, equipment, materials, supplies, and services, by the company or any of its affiliates corporations as defined herein, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, duties, fees, imposts, and all other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions." (AS AMENDED BY P.D. NO. 572.) Under the above-quoted provision of P.D. No. 334 specifically the 3rd paragraph of Section 13, the interests paid by you to the foreign creditor banks are exempt from Philippine taxes and therefore, you are not required to deduct, withhold and remit said tax to this Bureau. As regards the effect of P.D. No. 1931, P.D. No. 1955 and Executive Order No. 93, this Office believes that said executive issuances did not affect the exemption of the interest income paid by you on the foreign loans in question. It is noted that P.D. No. 1931 withdrew the tax exemption granted in favor of government-owned or controlled corporations, including their subsidiaries. As regards P.D. No. 1955, the tax exemption withdrawn were those granted in favor of "private business enterprises and/or persons engaged in any economic activity." Likewise, Executive Order No. 93 withdrew the tax exemption granted in favor of government and private entities. It is safe to conclude that exemptions withdrawn are those accorded to domestic taxpayers engaging in business in this country. Said executive issuances do not cover non-resident foreign corporations which are subject to income tax only with respect to their income from sources in the Philippines. Moreover, this Office believes and so holds, that the withdrawal of the exemption with respect to the interest income due to the foreign creditors under its aforesaid loan agreements violates the non-impairment clause of the Constitution. Furthermore, the loan agreement entered into by you can be considered international agreement of which the Philippines is a signatory since the same was authorized by the President of the Philippines and that the parties thereto are foreign banking institutions. Under P.D. No. 1955 and Executive Order No. 93, the tax exemption is not withdrawn with respect to those covered by said non-impairment clause and those covered by international agreements to which the Philippines is a signatory. Accordingly, the interest income of foreign loans remitted to your non-resident foreign creditors which are exempt from income tax under Section 13 of P.D. No. 334 remains exempt despite the issuance of P.D. No. 1955 and Executive Order No. 93. aisadc In view thereof, your opinion that interest payments to your foreign creditor banks remain tax exempt and not subject to withholding tax is hereby confirmed. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner