Interest Payments which the PLDT will make to FMO on Account of the Loan which the Latter Granted to the Former, are Exempt from Income Tax

October 24, 1991 BIR RULING NO. 215-91 28 (b) (8) (A) 000-00 215-91 Gentlemen : This refers to your letter dated March 26, 1991 requesting for a ruling to the effect that any interest payments which your client, the Philippine Long Distance Telephone Company, would make to the Netherlands Development Finance Company, in consideration of the loan which the latter will make available to the former, would not be subject to income tax and consequently, to any withholding tax, pursuant to the provisions of the Tax Treaty between the governments of the Netherlands and the Republic of the Philippines. It is represented that the Philippine Long Distance Telephone Company (PLDT), in connection with its expansion program, has entered into loan agreements with the Nederlandse Financieringsmaatschappij voor Ontwikkelingslanden N.V. (a.k.a. Netherlands Development Finance Company or FMO) whereby the latter agreed to finance the construction of PLDT's Eastern Visayas and Eastern Mindanao digital backbone project which was awarded to SEL Alcatel of Germany, for the equivalent consideration in Dutch guilders in the sum not exceeding US dollars twelve million five hundred thousand (US$12,500,000); that the said Netherlands Development Finance Company is a public limited company in which the State of Netherlands holds 51% and the Dutch privates sector 49% of the share capital; that FMO operates partly with funds drawn directly from the budget appropriation of the Minister for Development Cooperation and partly with State-guaranteed borrowings on the Dutch capital market; that FMO provides finance for the private sector in developing countries, with the object of contributing to the advancement of productive business in these countries in the interest of their economic and social progress, hence, the assistance in the form of a loan to the PLDT. In reply please be informed that the Tax Treaty between the Republic of the Philippines and the Kingdom of Netherlands has not yet taken effect. Although the Kingdom of Netherlands has already ratified it on November 13, 1989 and in the case of the Philippines, on January 1, 1991, no exchange of the instruments of ratification, as of this date, has taken place between the two parties. Consequently, the provision of the cited Tax Treaty are not yet binding upon the Government of the Philippines. Be that as it may, under Section 28 (b) (8) (A) of the Tax Code, as amended, income received from their investments in the Philippines in loans, inter alia , by (1) foreign governments; (2) financing institutions owned, controlled, or enjoying refinancing by foreign governments; and (3) international or regional financing institutions established by governments shall be exempt from Philippine income tax. A certification dated August 6, 1991 by the Royal Netherlands Embassy affirmed that the Nederlands Financieringsmaatschappij voor Ontwikkelingslanden N.V. (FMO) is a financial institution controlled and funded by the Netherlands Government. Such being the case, the interest payments which the PLDT will make to FMO, on account of the loan which the latter granted to the former, are exempt from income tax and consequently, from any withholding tax. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner