ITAD Ruling No. 194-02

October 29, 2002 ITAD RULING NO. 194-02 Sec. 32, Tax Code of 1997 Sec. 9, IFC Articles of Agreement BIR Ruling No. 234-82 H & Q Philippine Ventures, Inc. 22nd Floor, Equitable PCIBank Tower 2 Makati Avenue, Makati City Attention: Ms. Mel Evangelista Gentlemen : This refers to your letter dated March 23, 2001, requesting confirmation of your opinion that the cash dividend to be paid by H & Q Philippine Ventures, Inc. (H&Q) to the International Finance Corporation (IFC) is exempt from Philippine tax, pursuant to Section 9 of the Articles of Agreement establishing the IFC. It is represented that IFC is an international financing institution established by different governments, with principal office at 2121 Pennsylvania Avenue, N. W. Washington D.C. 20433 United States of America; that one of the signatories to the Articles of Agreement is the Government of the Republic of the Philippines which paid the amount of P332,000.00 as its subscription to the capital stock of IFC (Republic Act 1604 in relation to Republic Act 1926); that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated November 22, 2000; that H&Q is a corporation organized and existing under the laws of the Republic of the Philippines with business address at 22nd Floor Equitable PCIBank Tower 2, Makati Ave., Makati City; that as of March 15, 2001, IFC owns P1,411,635 preferred shares (inclusive of nominee shares) in H&Q as certified by H&Q's Assistant Corporate Secretary; and that on March 15, 2001, the Board of Directors of H&Q approved the transfer of the amount of P56,000,000.00 from the restricted retained earnings of H&Q to its unrestricted retained earnings, and declared cash dividend in the amount of P56,000,000.00 or P224.00 per share in favor of all common shareholders and P4.0727272727 per share in favor of all redeemable preferred shareholders of record as of March 15, 2001 out of H&Q's unrestricted retained earnings as of December 31, 1997, payable on or before April 18, 2001. In reply, please be informed that Section 32 of the Tax Code of 1997 provides as follows, viz : "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: "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 governments, and (iii) international or regional financial institutions established by foreign governments." Section 9 of Article IV of the IFC Articles of Agreement provides, viz : "Section 9. Immunities from Taxation "(a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty. ICTcDA "xxx xxx xxx" In view of the foregoing provisions and considering that the Philippines is a signatory to the IFC Articles of Agreement and that the IFC is an international financing institution established principally by foreign governments, income derived by IFC from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interests on deposits in banks in the Philippines shall be exempt from income tax. Thus, this Office confirms your opinion as it hereby holds that the cash dividends to be paid by H&Q to IFC are not subject to income tax and consequently not subject to withholding tax on income. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, 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