Land Bank of the Philippines as Authorized Government Depository Bank for JDF

October 9, 2002 ITAD RULING NO. 175-02 Sec. 32 (B) (7) (a) (ii) of the 1997 Tax Code DA-ITAD-88-01 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 Commonwealth Development Corporation (CDC) is exempt from Philippine tax pursuant to Section 32(B)(7)(a)(ii) of the Tax Code of 1997. It is represented that H&Q is a corporation organized and existing under the laws of the Philippines; that CDC is a corporation established by the Act of Parliament of the United Kingdom (UK) for the purpose of assisting in the economic development of certain countries; that in particular, CDC is empowered to operate in the Philippines based on the Agreement between the Government of the Philippines, as represented by then Secretary of Finance Roberto F. de Ocampo, and CDC, as represented by His Excellency Ambassador Adrian C. Thorpe, on September 3, 1997; that CDC is recognized by the Philippine Government as a financing institution owned and controlled by the UK Government as contemplated under Section 28(b)(8)(A)(ii) [now Section 32(B)(7)(a)(ii)] of the Philippine Tax Code; that based on the approval of Securities and Exchange Commission as per SEC Reg. No. 152228, Certificate of Filing of Certificate of Decrease of Capital Stock, H&Q decreased its capital stock from P409,100,000.00 to P11,000,000.00 divided into 11,000,000 shares of the par value of P10.00 each; that as of March 15, 2001, CDC owns 976,045 redeemable preferred shares as certified by the Corporate Secretary of H&Q; and that on the same date, H&Q's Board of Directors declared cash dividend in the amount of P56,000,000.00 or P224.00 per share in favor of all common stockholders 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(B)(7)(a)(ii) of the Tax Code of 1997 provides as follows: "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 xxx xxx xxx" Based on the foregoing, it is clear that income derived from investment in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by a financing institutions owned, controlled or enjoying refinancing from foreign governments shall be exempt from income tax. Such being the case and since CDC is recognized by the Philippine Government as an international financing institution owned and controlled by the UK Government as contemplated under the above-quoted provision, this Office is of the opinion and so holds that the dividend to be paid by H&Q to CDC shall not be subject to Philippine income tax and consequently to the withholding tax. ( BIR Ruling No. DA-ITAD-88-01 dated October 17, 2001 ) This ruling is issued on the basis of the foregoing facts as represented. 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. IaTSED Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service