Consulate-General of Japan in Cebu

November 10, 2022 DA ITAD BIR RULING NO. 049-22 Section 32 (B) (7) (a), Tax Code; Article 11, PH-Japan Tax Treaty; BIR Ruling No. ITAD-130-16 Consulate-General of Japan in Cebu 8th Floor, 2Quad Building Cardinal Rosales Avenue, Cebu Business Park 6000 Cebu City Gentlemen : This refers to your request for exemption from withholding tax on the official bank accounts of the Consulate-General of Japan in Cebu and Davao (the Consulates) and the personal bank accounts of their personnel, which has been indorsed by the Office of Protocol of the Department of Foreign Affairs (DFA-OP) to the Bureau of Internal Revenue on November 4, 2022. Based on the information received by the DFA-OP from the Philippine Embassy in Tokyo, the Government of Japan grants tax exemption privileges on interest-bearing accounts such as savings bank accounts (non-settlement type) and fixed bank accounts (time deposit) to the Philippine Embassy, its Consulates and their diplomatic and official personnel. Moreover, there is no tax imposed on ordinary/savings bank accounts (settlement type) and current bank accounts as these are not interest-bearing accounts. In reply thereto, please be informed that Sec. 32 (B) (7) (a) of the National Internal Revenue Code of 1997 (Tax Code), 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/post, which consists of embassies and consulates, 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 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (PH-Japan Tax Treaty), as amended 1 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 Japan: " 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 Contracting State. 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 10 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, 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, insured 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 Japan Bank for International Cooperation and the Nippon Export and Investment Insurance; b) In the case of the Philippines, the Development Bank of the Philippines and the Land 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 subparagraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two 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." 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 Consulates 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-Japan 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. 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) 2 In view of all of the foregoing, this Office is of the opinion and so holds that interests derived by the Consulate-General of Japan in Cebu and Davao in respect of their 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, and Article 11 (3) of the PH-Japan Tax Treaty. The said tax exemption does not extend, however, to the interest income earned by the officers and employees of the Consulates from their personal savings or current accounts with commercial banks in the Philippines. Section 32 (B) of the Tax Code enumerates the items of income that shall be excluded from gross income and shall be exempt from taxation. The income derived by a foreign government is included in the list but not the income earned by the officers and employees of a foreign government. Under the rule of statutory construction of expressio unius est exclusio alterius , where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to others. The rule proceeds from the premise that the legislature would not have made specified enumerations in a statute had the intention been not to restrict its meaning and to confine its terms to those expressly mentioned. 3 Had the legislature intended to include the income derived by the officers and employees in the items of income that are exempt from taxation, the same should have been expressly provided in the Tax Code. Also, the exemption granted to consular officers and employees under Article 49 of the 1963 Vienna Convention on Consular Relations does not include exemption from tax imposed on private income having its source in the receiving State. Accordingly, consular officers and employees are subject to Philippine income tax on interest derived from their personal bank accounts in the Philippines. Finally, interests derived from bank accounts are not subject to value-added tax (VAT). VAT is imposed on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. It is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. The interest income earned by consular officers and employees were not earned in the course of their trade or business; hence, it is not subject to VAT. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LARRY M. BARCELO Assistant Commissioner Legal Service Footnotes 1. Amended by a Protocol effective January 1, 2009. 2. Page 262, Model Tax Convention on Income and Capital, Condensed Version, November 21, 2017. 3. Centeno v. Villalon-Pornillos , G.R. No. 113092, September 1, 1994.