ITAD Ruling No. 074-00

June 2, 2000 ITAD RULING NO. 074-00 Article 11 RP-Australia 015-85 Export Finance and Insurance Corporation P O Box R65 Royal Exchange NSW 1223 Australia Attention: Angus Armour General Manager, Export and Project Finance Gentlemen : This refers to your letter dated March 9, 2000, requesting for confirmation of your opinion that the loans extended by banks to Philippine borrowers guaranteed or insured by the Export Finance and Insurance Corporation (EFIC) are exempt from withholding tax on interest pursuant to RP-Australia Tax Treaty. It is represented that EFIC is the official Export Credit Agency of Australia and is 100 per cent owned by the latter supported by a Government guarantee; that to support Australian exports, EFIC can either provide direct loans to Philippine borrowers or guarantee or insure Export Credit loans provided by international banks to Philippine Importers; that the Export Credit loan from a bank that is guaranteed or insured by EFIC and the associated benefits for the Philippine Importer are consistent with the Export Credits guaranteed by other OECD-Export Credit Agencies or with a direct loan provided by EFIC; that EFIC is restricted to support or finance 85 per cent of the value of goods imported from Australia and the guaranteed or insured bank typically finances amounts in excess of the 85 per cent financed by EFIC. It is alleged that the loans guaranteed or insured by EFIC provided by banks to Philippine borrowers are not subject to withholding tax on interest because of Article 11(7) of the RP-Australian Tax Treaty which provides: "(7) Interest derived by the Government of a Contracting State, or by any other body exercising governmental functions in, or in a part of, a Contracting State, or by a bank performing central banking functions in a Contracting State, shall be exempt from tax in the other Contracting State." In reply, please be informed that for lack of legal basis, your request cannot be granted. The aforementioned provision exempts interest income from withholding tax only when the recipient is the Government of Australia or any of its instrumentalities exercising governmental function or a bank performing central banking functions in Australia. Thus, the said provision is not applicable in this case because the recipient of the interest income is not the Australian Government nor EFIC and other governmental instrumentalities but the international banks that extended the loan to the Philippine borrowers. These banks are not governmental entities that may perform governmental functions and also are not performing central banking functions in Australia as contemplated by the foregoing provision. (BIR Ruling 015-85 dated February 8, 1985) cdlex Such being the case, the loans extended by different international banks to Philippine borrowers and guaranteed or insured by the Export Finance and Insurance Corporation (EFIC) are not exempt from withholding tax on interest. Only direct loans provided by EFIC are exempted from withholding tax on interest since it is the recipient of the interest income. Moreover, the interest income from loans provided by these banks to Philippine borrowers is subject to withholding tax at the rate 20% provided by Section 28(B)(5)(a) of the National Internal Revenue Code of 1997. However, if there is an existing Tax Treaty between the State where the bank is a resident and the Philippines, the bank may apply for a tax treaty relief and its interest income may be subjected to the preferential tax rate provided in the said Tax Treaty. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI OIC, Deputy Commissioner Legal and Inspection Group