ITAD BIR Ruling No. 093-14

June 20, 2014 ITAD BIR RULING NO. 093-14 Section 32 (7) (a); National Internal Revenue Code of 1997, as amended Department of Finance Roxas Boulevard corner Pablo Ocampo Sr. Street, Manila Attention: Hon. Rosalia V. De Leon National Treasurer Gentlemen : This refers to your letter dated May 9, 2014 requesting for the issuance of a ruling exempting from income tax interest to be paid by the Department of Finance ("DOF") to the Agence Francaise de Developpement ("AFD") . It is represented that AFD (also known as the French Development Agency ) is a public industrial and commercial institution with the status of specialized financial institution. Its main office is at 5 Rue Roland Barthes, Paris, France. It is registered with the Paris Trade and Companies Register under number 775-665-599. AFD's action is in line with the policy set out in France's Framework Document for Development Cooperation. This document was approved at the end of 2010 and in 2011 was translated into a three-year contract specifying objectives and resources between the French government and AFD. AFD's teams are based in Paris and Marseille and in a network of 70 agencies and representations in developing countries and the French overseas provinces. It is also responsible for the management of the French Global Environment Facility, which cofinances projects that reconcile environment and development. acCDSH It is further represented that on April 16, 2014, the AFD, acting as lender, and the Philippine government, through DOF acting as borrower, entered into a Credit Facility Agreement for the purpose of making available a facility to the Philippine government to support the first sub-phase of the Local Government Finance and Fiscal Decentralization Program . This program seeks to strengthen inclusive growth and to reinforce poverty reduction via improved service delivery by local government units, through the creation of a conducive fiscal framework, the development of an adequate and equitable resource framework, the strengthening of public financial management and the reinforcement of good local governance, transparency and accountability. The facility has a maximum aggregate principal amount of the euro equivalent of US$150,000,000.00 and can be availed upon request. The Philippine government shall use all amount to support the general budgetary requirements of the government to contribute to the implementation of the program excluding taxes, levies or duties of any kind. The funds will be disbursed in the form of an un-earmarked budget support to the Philippine Bureau of Treasury's central account. They will become part of the national resources of the treasury and will be managed, spent and controlled according to national procedures. In consideration, the Philippine government will pay interest to AFD at a fixed rate based on the outstanding principal owed at the time of the drawdown date. The interest rate shall not exceed 6.34 percent per annum but shall not be below 0.25 percent per annum. The Philippine government may specify in the drawdown request letter the maximum fixed rate. The loan shall also bear a late payment interest and a default interest on all amounts due and not paid on their payment date. The Philippine government shall also pay a commitment fee to AFD at the rate of 0.15 percent per annum. You now request for ruling exempting the interest to be paid by the Philippine government to AFD from income tax. In reply, please be informed that Section 32 (B) (7) (a) of the National Internal Revenue Code of 1997, as amended ("Tax Code") provides: ESCcaT "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: . . . (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 this section, 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 is exempt from Philippine income tax. In the case of AFD, inasmuch as it is a financial institution owned and controlled by the French government with a mandate to contribute to economic and social development in the poorest regions and countries, in middle-income countries, in emerging countries, and in French overseas provinces, by providing grants, soft loans, market-rate loans, and technical assistance, AFD shall be exempt from income tax on income it derives from investments in loans, stocks, bonds or other domestic securities, or on interest on bank deposits, pursuant to Section 32 (B) (7) (a) of the Tax Code. Accordingly, any income received by AFD, which includes regular interest, late payment interest, default interest, and commitment fee, paid by the Philippine government to AFD pursuant to the Credit Facility Agreement is exempt from income tax. aSDHCT 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue