ITAD BIR Ruling No. 184-15

June 3, 2015 ITAD BIR RULING NO. 184-15 Section 32 (B) (7) (a) National Internal Revenue Code of 1997, as amended Department of Finance Roxas Blvd. cor. P. Ocampo St., Manila Attention: Hon. Roberto B. Tan National Treasurer Gentlemen : This refers to your letter dated March 23, 2015, requesting for the issuance of a ruling exempting from income tax, the interest to be paid by the Department of Finance ("DOF") towards the Agence Francaise de Developpement ("AFD") . Facts It was represented that AFD, a public entity, wholly owned by the French Government, is both an (1) Industrial and Commercial Public Institution (EPIC, Etablissement a caractere Public Industriel et Commercial ); and a (2) Specialized Credit Institution. It is registered with the Trade and Companies Register of Paris. Its mission include the financing of infrastructure and urban development, water and sanitation, agriculture, education, health, environment and natural resources, private sector development. It further represented that on February 26, 2015, the AFD, as lender, and the Philippine Government ( Philippines ), through the DOF, as borrower, entered into a Credit Facility Agreement (" Agreement "), for the purpose of making available a Facility to implement the Bus Rapid Transit Project (" BRT Project "). This project is envisioned to improve the overall performance of the urban passenger transport system in Cebu City, in terms of the quality and level of service, safety and environmental efficiency. Along with the World Bank ("WB") and the Clean Technology Fund ("CTF"), the AFD undertook to make available for the Philippines , through the DOF and upon its request, a Facility in the maximum aggregate principal amount of Fifty Million Eight Hundred Ninety Three Thousand and Nine Hundred Sixty Three Euros (EUR50,893,963.00). The Philippines shall apply the amount borrowed under the Facility, exclusively towards the financing of the BRT Project , excluding all taxes and duties imposed in the Philippines, in accord with the Project Description 1 and the Financing Plan 2 as provided for in the Agreement. In return, the Philippines shall pay AFD a fixed rate interest on the drawdown of each payment dates. Said interest shall not exceed six point fifty two percent (6.52%) nor shall it be lower than zero point twenty five percent (0.25%) annually, notwithstanding any decline in the interest rate based on the Fixed Reference Rate , 3 increased or decreased by any fluctuation of the Index Rate 4 for the period reckoned from the Signing Date 5 until the relevant Rate Setting Date . 6 The Agreement shall also bear a Late-payment and Default Interest on all amounts due and unpaid and on unpaid overdue interest. In addition thereto, the Philippines shall be bound to pay a Commitment Fee of zero point fifteen percent (0.15%) annually, beginning from the expiry date of a three (3) month period from the Signing Date onwards. Finally, the Philippines shall repay AFD, the principal amount of the facility in forty semi-annual installments, due and payable on each payment dates. Based on the above representations made, you now request for a ruling exempting the interest to be paid by the Philippines 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: "SECTION 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 the afore-cited provision, 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, being a financial institution wholly owned and controlled by the French Government with its main thrust geared towards reduction of poverty and inequality, promotion of sustainable economic growth, reduction of negative climate change impacts and promotion of biodiversity, social and environmental responsibility through loan financing of infrastructure and other development projects centered on the French Government's cooperation and aid policy under its Official Development Assistance, AFD shall be exempt from income tax on the interest income it derived from loans extended to the Philippines, pursuant to Section 32 (B) (7) (a) of the Tax Code. Consequently, any income received by AFD, including the regular interest, the late payment interest, the default interest and the commitment fees paid by the Philippines, pertaining to the Credit Facility Agreement, are hereby exempt from income taxes. 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 Footnotes 1. Schedule 2 of the Agreement. 2. Schedule 3 of the Agreement. 3. Means one point fifty-three percent (1.53%) per annum. 4. Means the TEC 10 daily index, the ten-year constant maturity rate displayed on a daily basis on the relevant quotation page of the Reference Financial Institution or any other index which may replace the TEC 10 daily index. On the Signing Date, the rate is zero point sixty-seven percent (0.67%) per annum. 5. This Agreement was signed on February 26, 2015 . 6. Relative to any interest period for which an Interest rate is to be determined: (a) First Wednesday following the date of receipt by the Lender of the Drawdown Request, provided that the Drawdown Request is received by the Lender of least two (2) full Business Days prior to said Wednesday; (b) The second Wednesday following the date of receipt by the Lender of the Drawdown Request, if the Drawdown Request was not received by the Lender at least two (2) full Business days prior to the first Wednesday specified in paragraph (a) above.