ITAD Ruling No. 046-04

May 3, 2004 ITAD RULING NO. 046-04 Article 11 (4), RP-Japan Tax Treaty Sec. 32 (B) (7) (a), NIRC of 1997 Office of the City Accountant City of Cebu Attention: Ms. Edna J. Jaca City Accountant Gentlemen : This refers to your letter dated October 7, 2003, addressed to Mr. Jaime B. Santiago, Regional Director, Revenue Region No. 13, Cebu City, requesting our legal advice regarding the taxability of the interest being paid on the loan obtained by the local government of Cebu City with Japan Bank for International Cooperation (JBIC). ISTDAH In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows, viz : "Article 11 "xxx xxx xxx "(4) Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. " "For the purposes, of this paragraph, the team `financial institution wholly owned by the Government.' means: "(a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; (emphasis supplied) "(b) In the case of the Philippines, the Development Bank of the Philippines; and "(c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States." "xxx xxx xxx" Moreover, Section 32(B)(7)(a) of the National Internal Revenue Code of 1997 provides, viz : "(B) Exclusion from Gross Income . The following items shall not be included in gross income and shall be exempt from the 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 government, and (iii) international or regional financial institutions established by foreign governments. (emphasis supplied) "xxx xxx xxx" In view of the foregoing provisions and considering that JBIC is the result of the merger of Export-Import Bank of Japan and Overseas Economic Cooperation Fund ( BIR Ruling No. ITAD-21-99 ), this Office hereby holds that the interest income that will be derived by JBIC, being a financial institution wholly owned by the Japanese Government, is exempt from Philippine income tax ( supra ). ICaDHT Such being the case, the interest income to be paid by the local government of Cebu City shall not be subject to the final withholding tax of twenty percent (20%), pursuant to Section 2.57.1(I) of Revenue Regulations No. 2-98, in relation to Section 28(B)(5)(a) of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service