ITAD BIR Ruling No. 130-16

September 1, 2016 ITAD BIR RULING NO. 130-16 Section 32 (B) (7) (a), NIRC of 1997; Article 11, Philippines-Qatar tax treaty Embassy of the State of Qatar Block 4 Lot 6 Santiago St., Paseo de Magallanes Magallanes Village, Makati City This refers to your Note Verbale dated 05 April 2016, indorsed to this Bureau by the Office of Protocol of the Department of Foreign Affairs, requesting tax exemption on income, interest and other general transactions derived from the Embassy of the State of Qatar's ("Qatar Embassy") account in Maybank Philippines, Inc. 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, 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 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, as regards Qatar Embassy, Article 11 of the Agreement between the Government of the Republic of the Philippines and the Government of the State of Qatar for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Qatar 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. caITAC 2. However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State if the beneficial owner of the interest is: a) the other Contracting State itself or a political subdivision or a local authority of that State; and b) any governmental owned and controlled institution of the other Contracting State created under the national legislation of that State. 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. (Underscoring ours) And, 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 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 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) 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. Accordingly, since Qatar Embassy represents the Government of the State of Qatar, interests derived from its bank deposits in the Philippines are exempt from tax. In view of all of the foregoing, this Office is of the opinion and so holds that income derived from the account of the Embassy of the State of Qatar in Maybank Philippines, Inc., is exempt from tax, pursuant to Section 32 (B) (7) (a) of the NIRC of 1997, as amended and Article 11 of the Philippines-Qatar tax treaty. 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 is subject to Philippine withholding tax on interest derived from their personal savings/current accounts maintained with local banks. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue