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REPUBLIC OF THE PHILIPPINCOURT OF TAX APPEALSQUEZON CITY

PHILIPPINE LONG DISTANCETELEPHONE COMPANY P e t i t ion l?r

- v e r s u s - C.T.A. CASE NO. 4375

COMMISSIONER OF INTERNALREVENUE, Respondent . - - - - - - - - - \

DE I I 0 N

This i s a c la im fo r re fund of a l l eg ed lye r roneous ly remi t t ed withholding t ax on i n t e r e s t

,corresponding to t he por t ion of the loan f inancedby Korean Expor t - Import Bank (KOEXIM Bank) cove r i n gthe pur c hase and impo r t a t i o n of equipment as perthe supp ly con t rac t o r i g i n ~ l l y en te red i n t o byRepubLic Telephone Company with Gold S t a r Te le Elec:tt- ic C o ~ Ltd . GST) of Korea .

On Febr-uary 1 4 1 9 8 1 p e t i t i oner- acqu i red bypurchase the ~ e p u l i c Telephone Company RETELCO).As a re s u l t p e t i t i o n e r assumed t he o b l i g a t i o n sund e r which RETELCO was st ll bound to in a supp lyc o n t r a c t with Gold-Star Te l e -E l e c t r i c Co . Ltd .GST) o f invo lv ing the purchase o f

va r ious equipment by RETELCO fo r tsexpans ion / modern iza t ion program.

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DECISIONCTA CASE NO. 4375

- 2 -The c o n t r a c t co n ta in s the fo l lowing p e r t i n e n t

covenan t s :A r t i c l e 2 P r i ce s

The p r i c e s a r e g :l.ven in U.S. (USDol la r ) and c over de l ive t-y C FManila Por t as pe r INCOTERMS 1953and ONCOTERMS su ppl ement 1976 ands e r v i c e s as wi l l as ~ y t axes ,du t i e s , f ees o r any o th e r chargeswhich may from t ime to t ime bele,vied by the Gove rnment of theCountry of Or ig in of the equipmentfrom where the equipment wil l beex p o r t ed , BUT DO NOT INCLUDE ANYTAXES, d u t i e s , fee s o r o th e r chargeswhich may be l ev ied o u t s id e theRepubl ic o f l

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Development Corpora t ion (NIDC), as fol lows:A rt ie le 3 . Payment Guarantee of Paymen t

3 . 1 . 3 Payment of In t e r e s tX} X

a) Regular Semi-Annual In t e r e s tRETELCO sha 11 pay GST in te t -es t a tthe r a t e of S ven Poin t Seventy Five7 .75) percent p .a . on the

o u t ~ t a n d i n balance of thecont rac t ed e quipmen t p r i c e ~ semiannual ly , e v ~ r y June 15 and December15 of c h yea r un t i l the fu l lamoun t s paid . x x : ~

XXX

3 . 2 G u a r a n t ~ ~ of Paym

3 .2 .2 L e t t e ~ of Gua r an t eeNat ional investment: and DevelopmentCorpor t ion NIDC) s hal l i s sue ani r revoc able l e t t e r o f guaran tee infavor of GST wi thJ.n one 1 monthfrom va l ida t io n of t h i s c o n t r a c

~ . . h e r e the g u a r a n t o 1 ,uncond i t iona l lyguaran tees the payment in fu l l ofpr inc ipa l and i n t e r e s t on any of theforegoing pt-omissory no tes when andas due in a c c o r d a n ~ e with i t s terms.

3 . 3 Comfort L e t t e rWithin one 1 ) mon th af t e r i s su anceof the NIDC L e t t r o f G u a r a n t e e ~ thePhi l ipp ine Nation 1 Bank PNB) sha l li s sue a Com f o r t L e t t e r in favor ofGST s t t i n g t h ~ t NIDC i s asubs id ia ry of the PNB a nd commit t ingi t s e l f to make cap.l ta c:ont r i t lu t ionto NIOC ~ ~ h e n e v e r n c ssary to al lowthe l e t t e r to fu l ly meeti t s commitment under abover-t i c l e ~ : L 2

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DECISIONCT C SE NO 4 75

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As a c o n s e q u e n c e o f t h i s co n t r ac t . o r i g i n a l l ybe tween GST and R E T E L O ~ t h e EXPORT-IMPORT B NK . OFKOREA g r a n t e d GST an e x p o r t l oan to f i n a n c ei m p o r t a t i o n s o f RETELCO.

Having bought R E T E L C O ~ petit i o n e r pa idi n t e r e s t on J u l y 10 , 1 9 8 7 , O c t q b e r 1 3 , 1987 ,

F e b r u a 1 ~ y 10 , 1988 and J u l y 10 , 1988 , amount ing toU S 5 9 9 , 8 3 5 ~ and r e m i t t e d t o t h e BIR t h e 15/.w i t h h o l d i n g ta}: on t h e e n t i r e i n t e r e s t payment ont h e l o an , in c l u d i n g t h e p o r t i o n o f t h e c o n t r a c tf i n an c e d by KOEXIM BANK, in t h e t o t a l amount o fP1 , 8 6 4 , 4 5 8 . 0 1 E:{hs. F-Q ) i n c l u s i v e .

P e t i t i o n e r m a i n t a i n s t h a t t h e w i t h h o l d i n g t axon t h e i n t e r e s t on t h e p o r t i o n o f t h e p u rc h a s ep r i c e co r r e sp o n d i n g to s e v e n t y-s ix 76/ . ) p e r c e n t u mo f th e l oan e:{tende_d by KOEXIM B NK in t h e t o t a lamount o f P 1 , 4 1 6 , 9 8 8 . 0 9 were er-r o n eo u s l y pa id anda r e n o t ta :: ab l e n t h e P h i 1 i p p i n e s . NO s e r i o u so b j e c t i o n s were r a i s e d by r e sp o n d en t on t h e f a c t so f t h e c a s e and i n s t e a d r a i s e d t h e fo l l o w i n g l eg a li s s u e s in h i s memorandum:

1) P e t i t i o n e r PLOT d o e s n o t ha ve t h el e g a l p e r s o n a l i t y to institute t h i s c l a i mf o r t a x r e fu n d c o n s i d e r i n g t h a t t h e t a x e son t h e i n t e r e s t due t h e Ph i i p p i n eg o v e rn me n t a r e p a y a b l e by G o l d - S t a r T e l e E l e c t r i c C o . ~ L t d . ~ petitioner s c r e d i t o r

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DECISIONA CASE NO 4 75

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in the Republ ic of l

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DECIS IONCT C SE NO 4 75

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o f t h e o t h e r C o n t r a c t i n g S t a t e s h2. l l bet a : - ~ a b l e o n l y in t h a t o t h e r S t a t e if t h einterest is p a i d in r e s p e c t o f

i i > ~ g o --- m ~ c : f '- ' .__ .Ql: .? r.:.

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DECISIONCT CASE NO. 4375

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t ax ing i n t e r e s t on income only once , and t h a t i s ,only in t he o th e r s t a t e (Korea) , p a r t i c u l a r l y wheresuch i n t e r e s t , as in t h i s case , a r i s e s from a loanguaran teed by the E:-:port-- Import Bank o f Korea .Seventy - s i x (76%) o f the c r e d i t extended by GST toRETELCO ( l a t e r PLDT) was f inanced . by the KOEXIMBANK. I t i s t h i s 76 por t ion which p e t i t i o n e r

seeks to be spared from t ax in the Phi 1ipp ines ast shou ld be t axed only in Korea under the

a f o r e s a id t r e a t y .While the loan was ex tended to GST and who

t he re fo re appears to be the c r e d i t o r o f RETELCO, twas known by the KOEXIM Bi\NK t h a t the end use rwould be RETELCO who was i11port ing the equipmentfo r ts modern iza t ion and eypansion. Thus, KOEXIMB NK c e r t i f i e d t h t ~ t he loan o f US$6,623,000.00has been granted to GST by KOEXIM B NK purpose ly tof inan c e impor t a t ions of RETELCO , ( l a t e r assumed byPLDT) (E:-:hibit C p . 308, CT Record) . This i sc o n s i s t e n t with the o b j e c t i v e s o f KOEXI M B NK whichwas e s t a b l i sh e d to promote the sound developmentof the Korean economy and economic coopera t ion withfore ign c o u n t r i e s tht-ough the o f fe r i n g of loans ,gua ran tee s and o th e r f in anc: ial fac i l i1 : i e s . I ta l so e:{tends c r e d i t to fo re ign governmemts, banks

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and c o ~ p o ~ a t i o n s fo r impor t ing goods and t echn ica lse rv i c e s from Korea (Exh ib i t R ~ p. 302, CTARecord) In t u rn , t he payment by RETELCO ( l a t e rPLOT) of the ob l iga t ion was guaran teed bygovernment i n s t i t u t i o n s as the F NB and the NIDC.F i t t i n g l y , respondent admi ts in h i s m e m o ~ a n d u m t h a t

The loan secured from Golds ta r Tele - E l e c t r i c Co. ,Ltd. was gran ted / f inanced by the Expor t - Impor t Bank

o f Korea x x u/ . Thus, it can be l og i c a l lyes tab l i shed t h a t the RETELCO loan was, in e f f e c t , aloan from a Korean governmen t f i n a n c i a li n s t i t u t i o n , the KOEXI M BANK. This s e t t l ed ,f ind p e t i i o n e ~ ' s a 1 t e r n a t i ve r eco u rse to Sec t ion8 of the Nat iona l In te rna l F:evenue code to be a l s o

well :-founded. Sec t ion 8 enumera tes the ~ . Y . . ~ J l: ?. .Q IJ.?

(8) Misce l l aneou s i t ems. -(A) Income rece ived from t h e i rinves tments in the Phi l ipp ines in loans ,s to ck s , bonds, o r o th e r domest i cse c u r i t i e s , o r from i n t e r e s t on t h e i rd ep o s i t s in banks in the Phi l ipp ines byi ) fo re ign g o v e ~ n m e n t s , i i ) f inane ingi n s t i t u t i o n s owned, c o n t ro l l e d , o r

enjoying re f inanc ing from them, and iii)i n t e rna t iona l or reg iona l f inanc ingi n s t i t u t i o n s e s t a b l i sh e d by governments .Turning on ano the r po in t , r e sponden t s

r e l i a n c e on th e dec i s ion in Commissioner o f

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Interna l Revenue v Procter : Gamble Pf1C e t a l(G . R. No. 66838, 160 SCRA 560) cannot now s tand inthe 1i g h t of the Supre me Cour t s very r ecen t enb ne r e s o lu t io n December 2 1991) on the same casereve rs ing the prev ious dec i s ion of the secondd i v i s ion . But l e t t be emphas iz ed : f i r s t t h a t thea f o r esa id case i s d i s t i n g u i sh a b l e from t he p re sen tcas e . Here , the pe t i t i o n e r may be a thho ld ingagen t but more impor ta r.tl y t was a l s ocon t t-a c t u a l l y bound to shouJ.d e r and pay fo r thet a xes accru ing from the i n t e r e s t on the loan .Under the t e s t of fe red by p e t i t i o n e r worthy o f

n o t e ~ which i s t ha t the r ea l par ty in i n t e r e s t i sthe person who has the r i g h t to con t ro l and rece ivethe f r u i t s o f the l i t i g t i o n ~ t i s in fac t thep e t i t i o n e r t h a t s t a nds to su ff e r t he lo s s i f t h i sp e t i t i o n i s den ied o r w i l l be e n t i t led to the gaini f th e r e s u l t of the p e t i t i o n i s otherwisTh e r e f o r e p e t i t i o n e r can be cons ide re d a r ea lpa r ty in i n t e r e s t in the pre sen t case . I t appearsto us t h a t t h i s t e s t equa l s the s tandard ond e t e r min ing a r e a l par ty in i n t e r e s t propound e d inthe Procter and Gamble case which deemed to i nc ludea whol ly owned subs i d i a r y withho ld ing agen t on theb as i s tha t the s uhbs id i a ry ( P G - Phi l s . i s an

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a ge n t which is t h e paren t -- s t o c k h o l d e r o f P G USA . The p e t i t i o n e r i n t he p r e s e n t c a s e , h o w e v e r ~can l a y c l a i m to an e q u ~ l if n o t more t hans u b s t a n t i a l s t a k e to t h e fruits o f t he a c t i o n ,having bor-ne t h e t a x e s in t h e Ph i 1 i pp ine s p u r s u a n tto t he c o n t r a c t . V e r i 1y , pe t i t ioner.- in t h i s c a s ecan be c o n s i d e r e d a " ta:- :payer" a s t he t e r m has been

'e x p o u ~ e in t h ~ r e v i s e d Procter and Gamble ca s eN e i t h e r can we g i v e s u p p o r t t o a seeming

o b s t a c l e be ing pushed by r -espondent to bar-p e t i t i o n e r - ' s c la im .-which is s u p p o s e d l y t he pr-oof o fpaymr:: n t by GST o f t he cor-r-es;pondinq ta :- in t

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t.b e :t 9.th.g r P i the i n t e r e s t i s paid in r e s p ec tof :{ a loan m a d e ~ guara teed o r insured by x x xin the case o f o r e a ~ x x x the Expor t - Impor t Bankof Korea x :{ :{. (Unde rsc or ing su p p l i e d . In ta:{t r e a t i e s between s t a t e s used to avoid double

t a x a t i o n ~ the commitment by the . p a r t i e s mainlyinvo lved the a l lowance of a matching c r e d i t o r tax

r e l i e f ~ o r r ec ip r o ca l a c t i o n s . The conclus ion andr a t i f i c a t i o n of the t ax t r e .aty i s enough to leavean assurance to the p a r t i e s t h a t the commitmentwi 11 be honored. The c re a t i o n o f ad min i s t r a t i v erequ i rements t ha t w i l l not f a c i lita te t r a n sa c t i o n sbut i n s t e a d make fo r excess ive r o u t i n e s wil l d e fe a tanother purpose of t a x ~ e a t i e s whi c h i s theimpr-ovement o f commerce. f1ore s o ~ when we t akei n t o account the pecu l i a r r e l a t i ons h ip o f thep a r t i e s i nc iden ta l to the t ransac t ion discussedhere which are not in a su b s id i a r y -p a ren t

r e l a t i o n s h i p as in the P r o c t,e r and Gamble cast buta r e r e a l l y se para te e n t i t i e s .

F i n a l l y it may not be amiss to say t ha t fromanother ang l e , p e t i t i o n e r i s a l so c or r e c t to i n f e rt h a t i f under the r e l e v a n t prov is ions o f Sec t ion 28of the National In te rna l R f ~ v e n u e Code income onloans g ran ted by a f inanc i a l i n s t i t u t i o n o f a

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fore ign government such as the KOEXIM B NK i sexpre ss y excluded from gross income and exemptedfrom ta :

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CERTIFIC TION

hereby ce r t i f y t h ~ t t h i s dec i s ion wasreached a f t e r due consu l t a t ion between the membersof the Cour t of Tax ppeals in accordance thSect ion 3 ~ Ar t i c l e VIII o f the Cons t i tu t ion

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RO OUINJudgeppeals