ITAD Ruling No. 143-03

September 23, 2003 ITAD RULING NO. 143-03 Section 32 (B) (7) (a) National Internal Revenue Code of 1997 BIR Ruling No. ITAD 20-03 European Investment Bank 100, boulevard Konrad Adenauer L-2950 Luxemborg Attention: Mr. E. Uhlmann Mr. D.R.R. Dunnett Gentlemen : This refers to your letter dated July 14, 2003 requesting confirmation that the interest income derived by the European Investment Bank in the Philippines is exempt from Philippine income tax. It is represented that the European Investment Banks (the Bank ) is an international financial institution established under Article 266 of the Treaty Establishing the European Community of March 25, 1957; that the Bank , with principal office at 100, boulevard Konrad Adenauer, L-2950, Luxembourg, is composed of the Member States of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom of Great Britain and Northern Ireland; that being an international financial institution, the Bank provides loans to the Member States themselves, and loans for private and public undertakings of investment projects carried out within and outside the European territories of the Member States; that pursuant to the relevant decision of the Board of Governors of the Bank on February 22, 1993 and the Cooperation Agreement between the Bank and the Association of Southeast Asian Nations (ASEAN) which entered into force on October 1, 1980, the Bank may grant loans to countries in Asia and Latin America to finance investment projects in these areas; that on September 15, 1994 in Brussels, Belgium, the Philippine government and the Bank entered into a Framework Agreement on Financial Cooperation, where the Bank committed to the Philippine government a loan of up to 250 million euros a year for a period of three years beginning on February 23, 1993; that the loan shall be made available to the Philippine government and to other legal persons (public, semi-public, and private) established under the laws of the Philippines, and shall be utilized to finance investment projects in the Philippines as approved by the Bank ; and that on July 7, 1997 in Luxembourg, the Philippine government and the Bank entered into a Framework Renewal Agreement on Financial Cooperation, where the Bank extended indefinitely the period it shall grant loans to the Philippine government. In reply, please be informed that pursuant to Section 32(B)(7)(a) of the National Internal Revenue Code of 1997, 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 shall not be included in the gross income of these entities and shall be exempt from income tax. Accordingly, inasmuch as the Bank , being an international financial institution established by foreign governments , and the income concerned, being income from investments in loans , under Item (iii), interest derived by the Bank on loans granted to the Philippine government and to other legal persons (public, semi-public, and private) established under the laws of the Philippines shall be exempt from income tax. (BIR Ruling No. ITAD 20-03 dated January 30, 2003) Aside from the exemption under the National Internal Revenue Code, it is noteworthy that the same exemption is provided under the Article 8 of the Framework Agreement on Financial Cooperation, to wit: "Article 8 The Philippine government shall take the necessary measures to ensure that interest and all other payments due to the Bank in respect of loans granted pursuant to this agreement, as well as related guarantee payments, are made without deductions and withholding of any tax, levies or other imposts of any nature whatsoever legally due in the Philippines. " This ruling is issued based on 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service