BIR Ruling [UN-183-94]

June 24, 1994 BIR RULING [UN-183-94] MEMORANDUM FOR : The Hon. Secretary of Finance Manila RE : Taxation of Interest Income on Government Securities : Investments in Philippine Debt Instruments The Memorandum dated May 11, 1994 for his Excellency, the President of the Philippines from the Assistant Executive Secretary, Mr. Frumencio A. Lagustan on the subject of "Investment in Philippine Debt Instruments" was referred by that Office to the Acting Commissioner of Internal Revenue on May 18, 1994 for comment and recommendation. The following background on the subject was presented as follows: " BACKGROUND "1. Goldman Sach & Co., an influential U.S. investment bank had expressed, through their correspondent Philippine bank, firm interest in investing a sizable portion of their funds in Peso denominated debt instruments i.e. government securities and SEC registered commercial paper of Philippine corporations. Chemical Bank of New York and Overseas Bank of Singapore have likewise indicated their keen interest on such type of investment. "2. Critical to their proposed investments is a clarification of two tax issues, to wit: "(i) application and interpretation of a provision (Section 12(3) of the RP-US Tax Treaty of January 01, 1983 which provides for a withholding tax at a rate not exceeding ten percent (10%) of the gross amount of interest earned on the aforesaid debt instruments, and "(ii) Taxability/non-taxability of payments on interest rate swap transactions. "3. The proponents expressed that they are not requesting for any tax exemption or special treatment. What they seek is simply a definitive ruling/clear statement of the BIR's position on the foregoing issues. "4. It will be unfortunate that the enthusiasm of foreign investors would wane and opportunities for substantial foreign investments such as this would be missed due to failure to act promptly." Insofar as the U.S. investors are concerned, Article 12(3) of the RP-U.S. Tax Treaty provides that interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. The term " interest" as used in the RP-U.S. Tax Treaty means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales. Under the aforementioned Tax Convention provision, the tax on the interest income of a resident of the U.S. from investments in Philippine debt instruments and/or government securities shall not exceed 10% of the gross amount of such interest. However, with respect to the taxation of the interest income derived from investments in Philippine debt instruments by residents of other countries where the Philippines has not tax treaties , the same shall be governed by the pertinent provisions of the National Internal Revenue Code. Accordingly, with regard to "payments on interest rate swap transactions" to residents of the U.S., the same shall be governed by the RP-U.S. Tax Treaty, specifically Article 12(3) thereof. On the other hand, for countries where we have no tax treaties , the pertinent provisions of the National Internal Revenue Code shall apply. Thus, for non-resident alien individuals not engaged in trade or business within the Philippines, their interest income shall be subject to a final withholding tax rate of 30% under Section 22(b) in relation to Section 50(a) both of the Tax Code, as amended. With respect to non-resident foreign corporations/banks, their interest income from sources within the Philippines shall be subject to a final withholding tax of 35% pursuant to Section 25(b) (1) in relation to Section 50(a) both of the Tax Code, as amended. cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue