Exemption of the Interest Income Receivable by Kreditanstalt fuer Wiederaufbau (KFW) from Philippine Tax

October 18, 1989 BIR RULING NO. 216-89 25 000-00 216-89 Gentlemen : This refers to your letter dated August 16, 1989 requesting a ruling to the effect that the interest income receivable by Kreditanstalt fuer Wiederaufbau (KFW) from the Philippine Long Distance Telephone Company (PLDT) is exempt from Philippine tax under the RP-West Germany Tax Treaty and the pertinent provisions of the National Internal Revenue Code. cdta It is represented that the PLDT has embarked on their Fifth Expansion Program (X-5 Program) for the accelerated telephone and telecommunications development in the Philippines; that the financing required for such an expansion program will be partially provided by KFW, an instrumentality of the Federal Republic of Germany which extends loans to developing countries on behalf of the said country; and that in compliance with existing regulations of the Federal Republic of Germany, the said credit facilities will be insured by Hermes Krediversicherungs-AG otherwise known as "Hermes Deckung" the official West German government export credit insurer. In reply thereto, I have the honor to inform you that under paragraph 3(b), Article 11 of the RP-West Germany Tax Treaty, interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Weideraufbau or the Deutsche Gesselschaft fuer Wirtshaftliche Zusammenarbeit (Ent-wicklungsgesselschaft) shall be exempt from Philippine tax. Moreover, under paragraph 4, Article 11 of the same treaty, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a government instrumentality of the other Contracting State as by "Hermes Deckung" in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. Furthermore, even under Section 28(b)(8)(A)(i), (ii) and (iii) of the Tax Code, as amended, income received by foreign governments, financing institutions owned, controlled or enjoying refinancing by foreign governments and international or regional financing institutions established by governments 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 is exempt from income tax. Such being the case, and since KFW is an instrumentality of the Federal Republic of Germany aside from the fact that the loan is insured by Hermes Deckung, interest payments to be made by PLDT to KFW is exempt from Philippine income tax and consequently, not also subject to the withholding tax provisions of Section 50(a) of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner