Consulate General of Japan in Davao

January 15, 2020 ITAD BIR RULING NO. 014-20 Section 32 (B) (7) (a), NIRC of 1997; Article 11, Philippines-Japan tax treaty Consulate General of Japan in Davao 4th Floor, Bormaheco Building 209 J. P. Laurel Avenue, Bajada, Davao City 8000 Davao del Sur Attention: AAA _______________ Gentlemen : This refers to the claim for tax refund of the Consulate General of Japan in Davao, representing the final withholding taxes quarterly deducted from its current accounts with China Banking Corporation (Chinabank) Davao-Recto Branch in 2017 and 2018, which was referred by Revenue District Office No. 51-Pasay City to the International Tax Affairs Division of this Bureau for the issuance of a BIR Ruling confirming the Consulate General's entitlement to income tax exemption. In reply thereto, please be informed that Sec. 32 (B) (7) (a) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : AcICHD " 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. x x x" (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/consular mission falls within the purview of the term "foreign government" as used in the afore-quoted provision and is, therefore, exempt from income tax and consequently from the final withholding tax on interest on deposits in banks in the Philippines. Moreover, as regards the Consular Office of Japan in Davao, 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 (Philippines-Japan tax treaty) provides, 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 Contracting State. 2. However, such interest may 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. (Underscoring ours) caITAC xxx xxx xxx" According to the commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010) on paragraph 3 of Article 11 (Interest), "debt-claims of every kind" includes cash deposits. Therefore, any interest arising from such deposits and derived by the Japanese Government including its political subdivisions and local authorities shall be exempt from tax in the Philippines, to wit: "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. It is recognized, on the other hand, that mortgage interest comes within the category of income from movable capital (revunes de capitaux mobiliers), even though certain countries assimilate it to income from immovable property. On the other hand, debt-claims, and bonds are debentures in particular, which carry a right to participate in the debtor's profits are nonetheless regarded as loans if the contract by its general character clearly evidences a loan at interest." (Emphasis added) (Page 212) Accordingly, since the Consulate General of Japan in Davao represents the Government of Japan, interests derived from its bank deposits in the Philippines are exempt from tax. In view of all the foregoing, this Office is of the opinion and so holds that interests arising from cash deposits and derived by the Consulate General of Japan (Davao) are exempt from tax, pursuant to Section 32 (B) (7) (a) of the NIRC of 1997, as amended, and Article 11 of the Philippines-Japan tax treaty. However, as regards consular personnel maintaining personal savings/current account with local banks, please note that the exemption of consular personnel from all dues and taxes, personal or real, national, regional or municipal under Article 49 of the 1963 Vienna Convention on Consular Relations does not include exemption from tax on private income derived from sources within the Philippines. Accordingly, consular personnel are subject to Philippine withholding tax on interests derived from their personal savings/current accounts maintained with local banks. TAIaHE Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue