BIR Ruling No. 232-82

August 4, 1982 BIR RULING NO. 232-82 29-c-6 000-00 232-82 Messrs. Sycip, Gorres, Velayo & Company 6760 Ayala Avenue Makati, Metro Manila Attention: Mr . F . G . Tagao Tax Division Gentlemen : This refers to your letter dated February 18, 1982, requesting a ruling that the interest payments on the portion of the loan extended to your client, Philippine Mining Service Corporation, by Kawasaki Steel Corporation (Kawasaki) which was financed by the Export-Import Bank of Japan (Eximbank) are not subject to withholding tax while, the interest payments on the balance of the said loan are subject only to 15% withholding tax, in accordance with the RP-Japan Tax Treaty. cdtech It is represented that your client, a corporation duly organized and existing under the laws of the Philippines, during the period from January 6, to March 27, 1981 obtained from Kawasaki, a Japanese Corporation, two loans for the total amount of Y1,629,900,000 in order to finance your client's dolomite plant in Alcoy, Cebu; that 59.97% of the said loan, or the sum of Y977,400,000, was borrowed by Kawasaki from Eximbank as shown by the Certification, dated February 10, 1982, issued by Eximbank. In reply, I have the honor to inform you that Article 11, paragraph (4) of the RP-Japan Tax Treaty provides: "Notwithstanding the provisions of paragraph (2) and (3) interest arising in a Contracting State and derived by the Government of the 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 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, the 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-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting State." Article 11, paragraph (2) (b) of the said Tax Treaty provides: "(2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: xxx xxx xxx (b) 15 per cent of the gross amount of the interest in all other cases." Applying the aforequoted provisions of the said Tax Treaty, 59.97% of all interest payments made by your client to Kawasaki which corresponds to that part of the loan indirectly financed by Eximbank shall be exempt from withholding tax. The corresponding 40.03% balance of all interest payments shall be subject to 15% withholding tax. cdta Very truly yours, RUBEN B. ANCHETA Acting Commissioner