ITAD BIR Ruling No. 025-16

March 16, 2016 ITAD BIR RULING NO. 025-16 Section 32 (B) (7) (a), NIRC of 1997; Article 11 (3) (b), Philippines-Italy tax treaty Embassy of Italy 191 Salcedo, Legaspi Village Makati City Gentlemen : This refers to your Note No. A228 dated 18 August 2015 referred to this Office by the Office of Protocol of the Department of Foreign Affairs requesting for a certification that the Embassy of Italy is exempted from withholding tax on interest derived on bank deposits and property tax, as required by both local banks and the City of Makati. 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. : " 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 ours) 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 Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion (Philippines-Italy 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 State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the amount of the interest in respect of public issues of bonds, debentures, or similar obligations and paid by a resident of one Contracting State to a resident of the other Contracting State and 15 per cent of the amount of interest in all other cases. 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, interest arising in a Contracting State shall be exempt from tax in that State if: a) the payer of the interest is the Government of that Contracting State or a local authority thereof; or b) the interest is paid to the Government of the other Contracting State or local authority thereof or any agency or instrumentality (including a financial institution) wholly owned by that other Contracting State or local authority thereof; or c) the interest is paid to any other agency or instrumentality (including a financial institution) in relation to loans made in application of an agreement concluded between the Governments 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, as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. . . ." (Underscoring ours) With respect to cash deposits, commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010) consider such income 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 recognized, on the other hand, that mortgage interest comes within the category of income from movable capital (revunes n de capitaux mobiliers), even though certain countries assimilate it to income from immovable property. On the other hand, debt-claims, and bonds are n 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 above, interest on cash deposits derived in the Philippines by foreign embassies shall be exempt from tax considering that foreign embassies are considered as part of the government of the State of which they represent. In view thereof, considering that the Embassy of Italy represents the Government of Italy, interests derived from its bank deposits in the Philippines are exempt from tax. However, as regards diplomatic personnel maintaining personal savings/current account with local banks, please note that the exemption of diplomatic agents from all dues and taxes, personal or real, national, regional or municipal under Article 34 of the 1961 Vienna Convention on Diplomatic Relations does not include exemption from tax on private income having its source in the receiving State. Accordingly, diplomatic personnel are subject to the withholding tax on interest derived from their personal savings/current accounts maintained with the local banks. As regards real property tax, this Bureau declines to rule on this issue since it is beyond its jurisdiction to pass upon matters relating to taxes outside the scope of the 1997 NIRC, as amended. In this light, inquiry may be directed to the Bureau of Local Government Finance. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document.