BIR Ruling No. 214-82

July 15, 1982 BIR RULING NO. 214-82 53-b 000-00 214-82 Biophil, Inc. 16th Floor Citibank Center Paseo de Roxas Makati, Metro Manila Attention: Mr . Shiro Yamato Executive Vice-President and General Manager Gentlemen : This refers to your letter dated March 16, 1981 stating that in 1977, you obtained a foreign cash loan from your parent companies to finance the importation of machinery and equipment for your BOI registered production activity; that instead of tapping their internally generated funds, your parent companies secured a loan from Export-Import Bank of Japan for this purpose; that the amount of loan obtained from Export-Import Bank of Japan constituted 50% of the total loan extended to you by your parent companies; and that under your Credit Agreement, the withholding tax imposed by the Philippine Government on interest payments you would be obliged to make is to be shouldered by the borrower. You want a ruling on whether under the Tax Treaty between the Philippines and Japan, your interest payments pertaining to the one-half portion obtained from Export-Import Bank of Japan remitted after said treaty became effective on July 20, 1980 would not be subject to withholding under the Philippines income tax law. In reply, please be informed that pursuant to Article 11, paragraph (4) of the Convention between Japan and the Republic of the Philippines for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (signed at Tokyo on February 13, 1980 and which took effect on July 20, 1980) which reads: "Notwithstanding the provision of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political sub-divisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State." "For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: (a) In the case of Japan, Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; (b) In the case of the Philippines, the Development Bank of the Philippines; and (c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraph (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting State." the withholding tax imposed under the National Internal Revenue Code of the Philippines on the interest remittances on foreign loans shall not apply to your interest payments after July 20, 1980 covering the 50% portion of the loan granted to your parent companies by the Export-Import Bank of Japan which was in turn extended to you by your said parent companies. However, the interest payments on that half-portion of the loan pertaining to the funds owned by your parent companies shall remain subject to the withholding tax prescribed by Section 53(b) of the Tax Code of the Philippines, as amended, which amount of tax shall not exceed ten per cent (10%) of the gross amount of the interest. (Article 11, Section 3, Treaty). cdti Very truly yours, RUBEN B. ANCHETA Acting Commissioner