Applicable Taxes to Interest Payments of PT & T to Siemens, Munich, West Germany Under the RP-West Germany Tax Treaty

August 18, 1987 BIR RULING NO. 245-87 24 000-00 245-87 Gentlemen : This refers to your letter dated May 19, 1987 requesting a ruling to the effect that your interest payments to Siemens Aktiengesellschaft (Siemens), Munich, West Germany, are subject only to the 10% withholding tax pursuant to the RP-West Germany Tax Treaty. It is represented that Philippine Telegraph and Telephone Corporation (PT & T) a public utility company duly enfranchised under Republic Act No. 4161, as amended by Republic Act No. 5048 to render domestic and international telecommunications services, has been authorized on several occasions by the National Telecommunications Commission (NTC) and the Central Bank of the Philippines to import capital equipment and/or spares from Siemens, for the company's on-going expansion and modernization program as well as for its other operational requirements; that specifically, PT & T has imported and is continuously importing from Siemens through OA/DA arrangements under the Central Bank's Consolidated Rules and Regulations to Govern Import Transactions (CBP Circular No. 1029) equipment/spares; that each individual transaction is subsequently registered with the Central Bank of the Philippines for remittance of the repayment, including the allowed interest charges thereon; and that PT &T, upon the authority granted to it by the NTC pursuant to NTC Case No. 85-28 for the implementation of its National Packet Data Network (Datanet) project and the corollary approval by the Central Bank of the Philippines under Monetary Board Resolution No. 490 dated June 13, 1986 for a long term foreign currency loan to finance said project has executed the corresponding Credit Agreements with Siemens for a long term loan in the amount of DM 6.470.113. In reply thereto, I have the honor to inform you that paragraphs (1) and (2), Article 11 of the RP-West Germany Tax Treaty provide, viz: "Article 11" Interest "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other state. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: (a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations (b) 15 per cent of the gross amount of such interest in all other cases." Such being the case, interest payments to be made by PT & T to Siemens in connection with its importation of capital equipment and/or spares through OA/DA arrangements under the Central Bank's Consolidated Rules and Regulations to Govern Import Transactions (CBP Circular No. 1029) equipment/spares are subject to a 10% withholding tax pursuant to par. 2 (a)(i), Art. 11 of the RP-West Germany Tax Treaty. However, PT & T's interest payments to Siemens on its long term foreign currency loan to finance its National Packet Data Network Project is subject to a 15% withholding tax pursuant to par. 2(b), Art. 11 of the RP-West Germany Tax Treaty. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner