BIR Ruling [UN-280-95]

July 31, 1995 BIR RULING [UN-280-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue, Makati, Metro Manila Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated March 17, 1995 requesting on behalf of your client, PANGASINAN ELECTRIC CORPORATION (PEC), for a ruling that interest income earned by a resident of the United Kingdom (UK) from a loan extended to PEC and guaranteed by an instrumentality of the UK is exempt from Philippine withholding tax pursuant to Article 10 (4) of the RP-UK Tax Treaty. cdi It is represented that PEC is a domestic corporation organized and existing under Philippine laws; that it obtained a loan from Midland Bank and other banking institutions all of which are residents of UK; that the loan was guaranteed by the Export Credit Guarantee Department (ECGD) the Export-Import Bank of United Kingdom. In support of your request, you attached the following documents: 1) Letter dated November 11, 1993 to the Honorable Alfredo Pio de Roda, Jr., then Deputy Minister of Finance by the Honorable E. McGiven of the UK Inland Revenue stating that the UK Export Credit Guarantee is an "instrumentality" of the UK Government pursuant to the RP-UK Tax Treaty; 2) Reply letter dated January 3, 1984 addressed to Honorable E. McGiven by the Honorable A. P. Roda, Jr. confirming the status of ECGD as an instrumentality of the UK for purposes of the RP-UK Tax Treaty; and 3) Letter to the BIR Commissioner, Honorable Liwayway Vinzons-Chato dated February 10, 1995 by Mr. M. R. Williams of the UK Inland Revenue confirming that the Midland Bank is a UK resident pursuant to the RP-UK Tax Treaty. In reply, please be informed that pursuant to Article 10 of the RP-UK Tax Treaty which provides that: "Article 10. Interest "(1) . . . "(2) . . . "(3) . . . "(4) Notwithstanding the provision of paragraphs (2) and (3) of this Article (10), interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by: "(a) the Government of the other Contracting State a political subdivision or local authority thereof or an instrumentality of that other State; or "(b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. "The term "instrumentality" as used in this paragraph means any agency or entity created or organized by either Contracting Government in order to carry out governmental functions." the interest income which Midland Bank and the other UK residents banking institutions will derive from the loan granted to PEC and guaranteed by ECGD, an instrumentality of the UK Government is exempt from Philippine income tax and consequently from withholding tax imposed under Sections 25 (b) (5) (A) and Section 50(a) both of the Tax Code, as amended. [BIR Ruling No. 28 (b) (8)-216-89-174-91 dated September 6, 1991] cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)