ITAD BIR Ruling No. 015-17

May 12, 2017 ITAD BIR RULING NO. 015-17 Section 32 (B) (7) (a), Tax Code; Article 11, Philippines-Austria tax treaty; Article 34, Vienna Convention Embassy of Austria 8th Floor, One Orion Building, 11th Avenue corner 38th Street, Bonifacio Global City, Taguig Gentlemen : This refers to your Note No. PROT/0015/2017 dated 06 February 2017 referred to this Office by the Office of Protocol of the Department of Foreign Affairs requesting for a certification that the Embassy of Austria is exempted from withholding tax on interest derived on bank deposits. In reply, please be informed that Sec. 32 (B) (7) (a) of the National Internal Revenue Code of 1997, as amended (Tax Code), provides that: "Sec. 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (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." (Underscoring provided) Based on the above provision, 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 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, Article 11 of the Convention between the Republic of the Philippines and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Austria tax treaty), states that: " 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: a) 10 per cent of the gross amount of the interest if the interest is paid by a resident of the Philippines to a resident of Austria in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Austria, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, 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 and any financial institution wholly-owned or controlled by that government, or by any resident of that other Contracting State with respect to debt-claims guaranteed 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 and any financial institution wholly-owned or controlled by that government shall be exempt from tax in the first-mentioned Contracting State . For the purpose of this paragraph, the term "financial institution wholly-owned or controlled by the government" means: a) in the case of Austria the Osterreichische Kontrollbank Aktiengesellschaft; b) in the case of the Philippines the Central Bank of the Philippines and the Development Bank of the Philippines; and c) any such financial institution the capital of which is wholly-owned or controlled 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 Contracting States. 5. 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 prices to such securities, bonds or debentures." (Underscoring provided) Relative thereto, commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010), consider income from cash deposits as interest for purposes of Article 11 of a tax treaty, 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 recognised, on the one 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) Based on the foregoing, interest on cash deposits derived in the Philippines by foreign embassies shall be exempt from tax since foreign embassies are considered as part of the government of the State of which they represent. It is noteworthy to mention, however, that personal savings/current account maintained by diplomatic personnel in local banks are not covered by Article 34 of the Vienna Convention on Diplomatic Relations (Vienna Convention), which states, to wit: "Article 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (d) Dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;" In view of the foregoing and considering that the Embassy of Austria represents the Government of Austria, this Office is of the opinion that interest income derived by the Embassy of Austria from its deposits held in local banks in the Philippines are exempt from tax, pursuant to Section 32 (B) (7) (a) of the Tax Code and Article 11 (4) of the Philippines-Austria tax treaty. However, diplomatic personnel are subject to Philippine withholding tax on interest derived from their personal savings/current accounts maintained with local banks, pursuant to Article 34 of the Vienna Convention. For your information and guidance. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue