ITAD Ruling No. 195-03

December 23, 2003 ITAD RULING NO. 195-03 Art. 11, RP-Japan BIRRuling No. DA-ITAD 21-99 Tan & Concepcion Law Firm Suites 21032106, 21st Floor, Medical Plaza, Ortigas Bldg. San Miguel Ave., Ortigas Center 1661 Pasig City Attention: Cynthia M. Laureta Gentlemen : This refers to your letter dated September 23, 2003 on behalf of the Bases Conversion and Development Authority (BCDA) requesting for a confirmatory ruling that the interest income arising from the Loan Agreement between the Japan Bank for International Cooperation (JBIC) and the BCDA is exempt from Philippine income tax pursuant to Clause (4), Article 11 of the RP-Japan tax treaty and the Exchange of Notes between the Governments of the Republic of the Philippines and the Republic of Japan. It is represented that a Loan Agreement was executed between the JBIC and the BCDA involving the amount of Forty One Billion Nine Hundred and Thirty One Million Japanese Yen (Y41,931,000,000.00) to finance the implementation of the Subic-Clark-Tarlac Expressway Project (SCTE Project) of the BCDA; that the said loan was executed pursuant to the September 13, 2001 Exchange of Notes between the Governments of the Republic of the Philippines and the Republic of Japan under which the Government of Japan committed to extend a loan to the BCDA; that the grant of loan was made under the Overseas Development Assistance (ODA) program of the Government of Japan, with the JBIC as the lending institution, pursuant to the latter's mandate to undertake lending and other financial operation for, among others, the economic and social development and economic stability in developing countries; that the JBIC was established pursuant to the Japan Bank for International Cooperation Law, with its capital stock fully subscribed by the Government of Japan; that the JBIC expressly took over the functions of the Overseas Economic Cooperation Fund, which was dissolved as of the date of establishment of the JBIC; and that the principal amount of the loan shall earn interest at the rates provided for under Section 2, Article II of the Loan Agreement. In reply, please be informed that Article 11(4) of the RP-Japan tax treaty provides as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 percent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 percent of the gross amount of the interest in all other cases. 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. SaCIDT For the purposes of this paragraph, the term "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; 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." Based on the above, interest arising in the Philippines and derived by the Government of Japan or any financial institution wholly owned by Japan, specifically the Overseas Economic Cooperation Fund (OECF) and the Japan International Cooperation Agency (JICA),shall be exempt from income tax in the Philippines. Considering that in BIR Ruling No. DA-ITAD 21-99, dated August 24, 1999, the JBIC was recognized as a financial institution wholly owned by the Government of Japan when it took over the functions of the OECF, which was dissolved as of the date of establishment of the JBIC, this Office is of the opinion and so holds that the interest income derived by the JBIC from the Loan Agreement it executed with the BCDA is exempt from Philippine income tax pursuant to the RP-Japan tax treaty. (BIR Ruling No. DA-ITAD-21-99 dated August 24, 1999) However, the Loan Agreement executed by the JBIC and the BCDA is subject to documentary stamp tax imposed under Section 180 of the Tax 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. CITcSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service