Embassy of the United Arab Emirates

March 2, 2022 DA ITAD BIR RULING NO. 009-22 Section 32 (B) (7) (a), NIRC of 1997; Article 11, PH-UAE Tax Treaty Embassy of the United Arab Emirates 16th Floor, Commerce and Industry Plaza 1030 Campus corner Park Avenues Mckinley Town Center, Fort Bonifacio 1634 Taguig City Gentlemen : This refers to your Embassy Note No. UAE/MNL-22-080 dated February 16, 2022, indorsed to this Bureau by the Office of Protocol of the Department of Foreign Affairs, requesting for a ruling that the interest derived by the Embassy of the United Arab Emirates (UAE Embassy) from its savings and checking accounts with commercial banks in the Philippines are exempt from withholding tax. In reply thereto, please be informed that Sec. 32 (B) (7) (a) of the National Internal Revenue Code (Tax Code) of 1997, as amended , provides: " Sec. 32. Gross Income. x x x (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: x x x (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments , (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments and (iii) international or regional financial institutions established by foreign governments. xxx xxx xxx" (Underscoring ours) Based on the above provision, income from investments, e.g. , bank deposits, including interest on deposits in Philippine banks, derived by a foreign government is excluded from the computation of gross income and is exempt from taxation. A diplomatic mission/foreign embassy, being the representative of the sending State in the Philippines, falls within the purview of the term "foreign government" as used in the aforequoted provision and is, therefore, exempt from income tax and consequently from the final withholding tax on interest on deposits in banks in the Philippines. Article 11 (3) of the Agreement between the Government of the Republic of the Philippines and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (PH-UAE Tax Treaty) also exempts from income tax any interest arising in the Philippines if it is derived in respect of a loan made by the government of the United Arab Emirates: " 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 also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall, by mutual agreement, settle the mode of application of this limitation. CAIHTE 3. Notwithstanding the provisions of paragraph 2 of this Article, interest as defined in paragraph 4 of this Article 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 the government of the other Contracting State or political subdivision or local authority or local governments, including financial institution wholly owned by that government, or any instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. 4. The term 'interest' as used in this Article 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article." (Underscoring and emphasis supplied) In determining whether the cash deposits in this case are considered loans, we should refer to the domestic law of the Philippines, particularly Articles 1933 and 1980 of the Civil Code of the Philippines , to wit: Article 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. It is clear from the foregoing provisions that bank deposits, whether fixed, savings or current, are loans to banks, with the depositor as the creditor and the bank as the debtor. Undoubtedly, the subject interests were derived by the UAE Embassy in respect of the loan provided to the bank. It is worth emphasizing that reference to the Civil Code is not without legal basis but is allowed under Article 3 (2) of the PH-UAE Tax Treaty, which states that as regards the application of the treaty at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for income tax purposes, and the meaning of that term under the applicable tax laws of that State shall prevail over the meaning given under other laws of that State. In this case, the term "loan" is not defined under the Tax Code, so reference to other domestic laws of the Philippines may be resorted to. Moreover, based on the commentaries of the Organisation for Economic Co-operation and Development (OECD), on paragraph 3, Article 11 of its Model Tax Convention on Income and on Capital , the term "debt-claims of every kind" embraces cash deposits; hence, income from such cash deposits are considered as interest, thus: " Paragraph 3 18. Paragraph 3 specifies the meaning to be attached to the term 'interest' for the application of the taxation treatment defined by the Article. The term designates, in general, income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in profits. The term 'debt-claims of every kind' obviously embraces cash deposits and security in the form of money, as well as government securities, and bonds and debentures, although the three latter are specially mentioned because of their importance and of certain peculiarities that they may present. x x x" (Emphasis added) 1 In view of all of the foregoing, this Office is of the opinion and so holds that interests derived by the UAE Embassy in respect of its cash deposits with commercial banks in the Philippines are exempt from tax and consequently, from withholding tax, pursuant to Section 32 (B) (7) (a) of the Tax Code of 1997, as amended, and Article 11 (3) of the PH-UAE Tax Treaty. The said tax exemption does not extend, however, to diplomatic personnel maintaining personal savings or current accounts with commercial banks in the Philippines. The exemption granted to diplomatic agents under Article 34 of the 1961 Vienna Convention on Diplomatic Relations does not include exemption from tax imposed on private income having its source in the receiving State. Accordingly, diplomatic personnel are subject to Philippine income tax on interest derived from their personal bank accounts in the Philippines. DETACa Very truly yours, Commissioner of Internal Revenue By: (SGD.) LARRY M. BARCELO Assistant Commissioner Legal Service Footnotes 1. Page 262, Model Tax Convention on Income and Capital, Condensed Version, November 21, 2017.