ITAD Ruling No. 185-00

December 7, 2000 ITAD RULING NO. 185-00 RP-Germany Interest BIR Ruling 269-92 Philippine National Oil Company PNOC Building VI, Energy Center Merritt Road, Fort Bonifacio Taguig, Metro Manila Attention: Bernadette B . Jugan Manager, Legal Department This refers to your letter dated June 16, 2000 on behalf of BAYERISCHE LANDESBANK GIROZENTRALE (BAYERISCH; SINGAPORE) requesting confirmation of your opinion that the interest payments made by the PHILIPPINE NATIONAL OIL COMPANY (PNOC) to BAYERISCHE SINGAPORE shall be exempt from Philippine tax pursuant to RP-Germany Tax Treaty. It is represented that Bayerische Landesbank Girozentrale of Germany (BAYERISCHE GERMANY) is located at Munich, Brienner Str. 20; that it has an existing branch in Singapore, BAYERISCHE SINGAPORE, with office address at 300 Beach Road #37-01, The Concourse, Singapore; that BAYERISCHE GERMANY does not have an office in the Philippines within the meaning of "permanent establishment" under Article 5 of the RP-Germany Tax Treaty; that on October 28, 1996, the Bureau of Internal Revenue has given Bayerische Landesbank Girozentrale a formal letter stating that it is a governmental institution within the meaning of Article 11 of the RP-Germany Tax Treaty and is exempt from withholding tax on interest income; that PNOC is government owned and controlled corporation established by virtue of Presidential Decree No. 334 (as amended) of the Republic of the Philippines with business address at PNOC Building VI, Energy Center, Merritt Road, Fort Bonifacio, Taguig, Metro Manila; that on March 27, 2000, a US$130,000,000.00 loan facility was made available to PNOC as borrower by a group of banks on whose behalf Citibank, N.A. Manila Branch acted as an agent; that one of the banks is BAYERISCHE SINGAPORE which has a participation of USS12,000,000.00 with an interest rate on such loan as stated on the Facility Agreement. In reply thereto, please be informed that Article 11 of the RP-Germany Tax Treaty states that: "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. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the laws of that State, but the tax so charged shall not exceed: AIDcTE "(a) 10 per cent if such interest is paid: "(i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or, "(ii) on any loan of whatever kind granted by a bank, or "(iii) in respect of public issues of bonds, debentures or similar obligations. "(b) 15 per cent of the gross amount of such interest in all other cases. "3. Notwithstanding the provisions of paragraph 2, "(a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; "(b) interest arising in the Republic of the Philippines and paid to the German Government; the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschfliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. CTaSEI "The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply. "xxx xxx xxx" Based on the foregoing, interest arising in the Philippines and paid to an entity which has been determined by the competent authorities as a government institution to which tax exemption under Article 11 paragraph 3 of the RP-Germany Tax Treaty shall apply shall be exempt from Philippine tax. Since BAYERISCHE; SINGAPORE is a branch of BAYERISCHE GERMANY, a governmental instrumentality of the Government of the Federal Republic of Germany and acknowledged as such by this Bureau in a letter dated October 28, 1996, interest payments made by PNOC to BAYERISCHE SINGAPORE shall be exempt from Philippine income tax. (BIR Ruling 269-92) Further, the loan agreement executed by and between them shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group