ITAD BIR Ruling No. 043-17

December 1, 2017 ITAD BIR RULING NO. 043-17 Section 32 (B) (7) (a) National Internal Revenue Code of 1997, as amended Department of Finance Roxas Boulevard corner Pablo Ocampo Sr. Street 1004 Manila Attention: Maria Edita Z. Tan Assistant Secretary International Finance Group Gentlemen : This refers to your letter dated November 7, 2017 requesting this Bureau to issue a tax exemption certificate/ruling to the Agence Francaise de Dveloppement ("AFD") pursuant to the Philippine government's obligation under a Credit Facility Agreement ("Agreement") dated October 27, 2017. HTcADC Under the Agreement, the Philippine government, as borrower, and acting by and through the Department of Finance ("DOF") , obtained a credit facility from the AFD amounting to 100,000,000.00 euros. The purpose of this facility is to support the Philippine government's general budgetary requirements for fiscal year 2017. In consideration, the Philippine government will pay interest and other related payments to AFD . Related payments include commitment fee equivalent to 0.15% of the available credit facility computed and payable per annum, and prepayment indemnity to cover any losses suffered by AFD as a result of any prepayment by the borrower of an outstanding principal prior to its maturity. AFD is a public financial institution entrusted by the French government with the role of the main operator of France's cooperation policy. AFD combines the functions of a development bank and an implementing agency for France's Official Development Assistance policy. As a specialized credit institution, AFD is subject to banking law, particularly, in the field of risk sharing. The loan with AFD was approved by the Development Budget Coordination Committee under Resolution No. 2017-1 dated March 17, 2017. The Committee is composed of the Secretary of Budget and Management, as chair; the Secretary of Finance, as vice-chair; and the Deputy Executive Secretary of the Office of the President and the Secretary of the National Economic and Development Authority, as members. In reply, please be informed that Section 32 (B) (7) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (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." Under Section 32 (B) (7) (a) of the Tax Code, foreign governments, financing institutions owned, controlled, or enjoying refinancing from foreign governments, and international or regional financial institutions established by foreign governments are exempt from income tax on income derived from investments in loans, stocks, bonds or other domestic securities, and interest on local bank deposits. Under the Agreement, AFD is entitled to receive interest, commitment fee, prepayment indemnity, and other related payments arising from the credit facility it provided to the Philippine government. Accordingly, this Bureau holds that all payments made by the Philippine government to AFD under the Agreement are exempt from income tax under Section 32 (B) (7) (a) of the Tax Code by reason that AFD is a financing institution owned and controlled by the French government, and those payments (interest, commitment fee, indemnity, etc.) constitute AFD 's income from investment in loan granted to the Philippine government. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue