CTA Case No. 4411 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE LONG DISTANCE TELEPHONE COMPANY and PRIVATE EXPORT FUNDING CORPORATION, Petit i oner�, - vers�.Js - C.T.A. CASE NO. 4411 COMMISSIONER OF INTERNAL REVENUE, Re s ponden t . X- - - - ------X DEC B 0N This is a judicial action involving petitionet' ' s claim fot' t' efund ot' the issuance of the cot't'esponding tax Ct'edit cet'tificate in t h e amount of P6,731,638.63 representing erroneo u sly vJ i t h h e 1 d t ax e s on i n t e t' e s t pa y men t s d u e P t' i vat e Export Funding Corporation <PEFCO> . The undisputed fact s are as follows: On Apt' il 7, 1987 the petitionet' , Philippine ~ong Distance Telepho n e Co mpa ny <PLDT> , ent et'ecl into a ct'edit a~p' eement <Exh. "A"> with the Pt'ivate Expot't Fundi n g Co t'pOt'ation <PEFCO >, a cot'pOt'atio n organized under the laws of the State of Dela ware , United States of ~)met'i'ca, fat�' the pt�' incipal a moun t of US$'tl, O l Lt, 860.00 payable in t went y (20) equa l, successive se mi -anntla 1 install me n ts, to fina n ce petitionet'' s s h at'e in t h e const t' u ction of t h E.' two

DECISION CTA CASE NO. 4411 - 2- fiber~- optic submat~ ine cable system c onnecting the USA, Guam and the Philippines and othet~ t�' elated Philippine inland transmission system. The afot�'esaid ct�' edit agt~ eement is guat�' anteed by the Expat~ t Impor~ t Bank of the United f:l tates, <EXIMBANI-< fot~ shot~ t>, a wholly owned s ub s idiat~ y of the United States government. The guar antee issued by EXIMBANK subsisted when the credit agreement was i:\ s signed by PEFCO to It~ ving Tr~ ust Company as pet~ Notice of Assignment dat~d February 11, 1988, <Exh. "B - Lt"). The assignment was appt~ aved by the Centt~ al Ban i< of the Philippines in a lettet~ dated Apt~ il 8, 1988 <Exh . "B - 5"). Fat~ the pet~ iad De c ember~ 7, 1987 to Au~tust 10, 1988, petitioner withheld and r emitted to the re s pondent a 20~ tax on inte r est payments to PEFCO a nd fot~ the per~ iad Febt~ u.::n~ y 18, 19E:\9 to June 13, 1 9 8 9 , a 1 5 ~ t ax on i n t e t�� e s t pay men t s t o It~ v i n g Tt~ ust Company. T h e t o t a 1 am o �.m t o f t ax w i t h h e 1 d and t~ emitted is P6,731,638.63 as follows <Exh. "B- 6"): Qtb_ OR.JJlJ. I nb.tuL~eid. T.tlt!lllbhtld. ~u.,__~_Q. (liS ., (liS ., p 297,116. 09 2,201,780.36 12- 1o-87 B-12955~ � 71,660.60 � 1 ~,336.12 2,208,980.98 8- 1o-88 8-58~143 476,387.52 95,229.50 2,223,761.20 2-1o-89 668,413.42 100, 262.01 6- 13-89 B-14210350 687,491.87 103,123.78 ------------- B-17039110 ------------ ----------- P6, 731,628.63 U,9031973.41 f312,949.41 4'?6

DECISION CTA CASE NO. 4411 - 3- I n a J. e t t e t~ d at e d N() v e 111 b e t~ 1 5 , 1 9 8 9 t~ e c e i v e d by the t�' e s pond ent on Novembet�' 2 0, 1989, the pet i tionet~ f i l e d a claim for~ r~ efund or~ tax ct~edit of the amount of P5,731,538.5 3 <E><h. "B") representing the withholding ta><es on the interest payments paid and to the respondent during the period from December 1987 to June 1989. r~ e s pond ent failed to act on said c 1 a i 111 for~ t~ e fund or~ i s s u an c e o f t h e t c\ x c t~ e d i t c e t~ t i f i cat e � Hence, to ~n-�otect i t s t~ ight and to forestall the running of the two - year prescriptive pet~iod, petitionet-� instituted the instant petition for~ ~-~ evie\.'1. The issues pre s ented before the Court for resolution are as follows: (1) 1-Jhether~ or' not petitionet�' is entitled to the refund pursuant to the provisions of the RP - US Tii:\X Tt~ eat y ; and (2) 1-Jhethet~ or~ not PLDT has the pet' sonality to institute an action for a tax refund. On the fit's t i s sue, petitionet~ claim s that inasmuch a s the interest income paid by petitioner to PEFCO and to Irving Tru s t Company under the loan agt' e em ent wet' e to t�'esidents of the ot het~ contt~acting state, the USA, and that s uch loan was

.' DECISION CTR CASE NO. 4411 - 4- qual�' anteed by the Expot' t - � Impot' t B an ~< of t h e USA, it '+ , fa 1 1 s w i �t h i n t h e c o v e t' a g �:'. o f S e c t i o n (-h ' t i c 1 e l 2 of the RP- US Tax Treaty. Thus, such i nt et'e s t income is exempt fl�'om a ny income t.::n<, withholding at' othet'Wi se, imposed by the Republic of the Ph i 1 i p pines. On the other hand, respondent argues that neither PLOT nor PEFCO is among tho se institutions mutually agreed u pon by the government of the Philippines and the United Stat e s of America which may a vail of the tax benefits pt'O vi d ed �.tnd et' Se c tion 4, ~kticle 12 of the RP-US Tax Tt'eaty. EXI 1~1BANI~' s t'ole is on l y to guat'antee the ct'e d it agt' eement between PLOT and PEFCO and is not the beneficiary of the interest paid by petitioner PLDT, citing the case of Conn1iss ion er of Int ernal Revenue vs. Mitsubi shi Met al Corp . , 181 S CRA 214 . Accot'dingly, PEFCO cannot clai m the tax rwivi l ege granted to EXIMBANK under the RP- US Tax Treaty because this is a purely per so nal privilege granted to the lattet'. Fat' a bettet' und e t�'st and i ng of the law involved, we quote het'eundet' the pt' ovisions of the RP-US Ta>< Tt'eaty, specifically -� Section 4, Article 12 thereof: ( 1) ' Not wi t h s t and i n g p at' a g t' a ph s an d <:'3 ) i n t e t' e s t d e t' i v e d b y - 4 3(;

r DECISION CTA CASE NO. 4411 - s- <a ) 0 n e o f t h e C o n t t ' '"' c t i n ~:t S t '" t e ~' , ot' an instt' Umentality thet' eof (i n c luding t h e Cent t' a 1 Ban ~< o f t h e Ph i 1 i p p :i. n e s , t h e F ed e t' a 1 Re s e t' v e Ban ~< o f t h e Un i t e d S t at e s , the Export - Import Bank of the United State s , the Ovet'sea s Pt' ivate Inve s tment Corporation of th e United S tates, and such othet' :in s titution~; o �f e ither C6ntracting State as the c ompetent a uthoritie s of both Contracting States m<a y d e t e t' mi n e by mu t u a 1 a g t' e e me n t ) , o t' (b) A t��. e s i d en t o f on e o f t; h e C on t t' a ct i n ~~ S t at e s 1:1_;j,j;jJ_.t�' e s _Q_g_~t _t_Q_Q~!?..:t .Q..9J. A..9..~~J...Q.!LLill' a r' ~lt.f. e..9__91.:' i n s u t�� e c.L. ..QY._ t h.E..:t !;;;_onb'~ ctj,_ng State Ot' an insb-�t..qn e n t a l i t.Y. t !.l e t:_e of'- � s h a 1 1 be -~~-IT!.P_L___:f.!:..9 m_._t_e.~ gy_.__. . . . . ...!i..tL~--. ..9..i.tL~..c.. __G_9.n. :~.!:.�...r;:.:tJ n g s t eJ~.. . X >< >< II <Underscoring s upplied). A analysi s of th e pt' ovi si on s of the tax tt' eaty will s how that it exempt s ft' om ta><ation intet'e s t det' ived by one of the C ontr a cting States in two ca s es, n a me l y: <1> When t he inte r e s t is deriv e d by the other c on t t ' ac t in q s tate it s elf ot' an i n s t t ' u me n t a 1 i t y \.'Jh i c h include s othet' S in the en u me r�� at i on , t h e C ent t' a 1 Ban ~< o f t h e ~:o 1-li l i p p i n e s , t h e F ed e t' a 1 Re s e t' v e Ban k s o f t h e Un i t e d S t a t e s , tb..~ 1-Jh e n the intet' e s t is by a t' esident of one of the contt' acting s tate s with r' e s p e c t t o d e b t o b 1 i g at i o n s 9..!:-.!.�' t' an t e e d o t ' i n s tit' e d t het' eof. 48

DECISION CTA CASE NO. 4411 - 6- This case involves a Credit Agreement entered into by and among the Philippine Long Distance Telephone Company, as and the Philippine and Foy�eign Loan Guarantee <Phi 1!-JU.::n~ antee), as "Guat~ ant ot'", a t' esident and an instt' Umentality of the Philippine g o v e t' n men t , t~ e s p e c t i v e 1 y , on t h e on e hand and t h e Funding Corporation <PEFCO>, as "Lendet' " and Bank of the United States <EXIMBANK>, as "Guat~antot' ", a t' es-.ident and an instrumentality of the United States government, t' espectively on the othet~ hand <Exh. "A"). Undet' EXIMBANK is to the t��epayment s of und et' the plus intet��est thereon in accordance with a certain Guarantee Agt' e e ment dated Decem bet~ 15, 1971 betvJe en EX Itt1BANK and PEFCD. Pursuant to the Utilization Procedures may eithet' t'equest ft'om PEFCO a t'eimbtwsement ot' f Dt' of CTedi t to finance its In both cases, EXIMBANK appt'oves the d i s b tn~ s e men t s o f fund s be f o t' e t h e y at' e act tl a 1 1 y In fact, undet' sublettet' D of At-ticle VI, the bot't~owet' has to satisfy by evidence ot' to the satisfaction of EXIMBAM~ the

DECISION CTA CASE NO. 4411 - 7- t' e i mb u t' s e me n t b e f o t' e t h e act u a 1 t' e 1 e a s e i s mad e � Even on the mattet' of suspensio n and cancel lation (At' ticle VII> of the utilization of this ct'edit by the it is EXIMBANK which has the aut h o t... i t y t o ma~< e t h e s tl s pen i on o t' can c e 1 1 at i on . These facts disting ,_ti s h the Ct' edit a~weement in thi s c a s e f t' Oill th e Ct'edit C\~wee men t , entet' ed into by a nd AtlC\S Consolidate d Min in[~ and De vel o pment (Atlas and i~li t s 1.1b ish i l't1~t a 1 Cot'pot'at ion of Japan in the case o f C omm:i.ssi.on e t' of lt1tet' nal Re venu e v s . Mitsubishi � 2 2, 1990, 1B1 SCRA 21.��, ci �teti by t' espondent. In t h e 1 a t t e t' cas e , C\ cT e d i t a g t' e e men t was en t e t' e d i nto by and between Atlas and Mitsubi s hi. An ot het' con t t' a ct o f 1 o an wC\ s en t fH' e d i n t o by and bet we en Mit s ubi s hi and E XIMBANK of Japan. As found by the the is d i f fe r e nt from the first con t ract. It is comple�te i n i �t; s e 1 f, d o e s n o t a p peat.. t o be s up p 1 e t o t' y o t' collatet' a1 to anothet' contt' a c t and is, thet' efo t'e, not t o be di s torted by other co n sideration aluin de. In th e instant c a s e, as discu s sed above, thet'e is only on e c ont rac t inv o lved ~mbodying the rights and ob lig a tions o f a ll th e p a rties, including EXIMBANK. The f iilc t th Ci\ t th e t"e i s anot he r' conb' act betwee n

. DEC ISION CTA CASE NO. 4411 - 8- PEFCO and EXIMBANK doe s not matt et~ as thi s made a s to the ct~ ed i t agt~ eement into by and among PLDT, Philguarantee, PEFCO and EXIMBANK which are all signatories to the credit agreement. The situation ther e fore falls s pecifically under subletter (b) of the a fot~ equoted pt~ ovi s ion of the tax tt~ eaty which i s , intet~ est det~ ived by a t~ esident of the United Stat es with respe c t to a debt obligation guaranteed ot~ in s twed by an instt~ umentality of the United S tates, such as EXIMBANK. Anent the s e c ond i ss ue of whether or not PLDT ha s the personality to in s titute the instant a ction fot~ t~ efund , suffice i t to say that in Commis s ionet~ of Intet~ nal Revenue vs. Pt~ octot~ & Gamble Philippine Manu fa ctur ing Corporation and the Court of Tax Appea 1 s , G. R. No. 66838, Dec. 2, 19 9 1, the Supt~ eme Cotwt alt~ eady t~ uled th;:d ; the withholding agent, bein ~~ the pat~ ty liable fot~ the tax, has s ufficient leg a l intet~ e s t to bt~ ing the suit ot~ ac tion fot�� ,' t~ efund. The en b a ne t~ e s olution pt~ evio�.t s decision of the S econd Divi s ion of the same Cotn~ t on the s ame case to the effect that Pt~ o c tot~ & Gamble <PMC), being a met~ e withholding agen t , had no pet~s onal i t y to claim f ot~

DEC I S ION CTA CASE NO. 4~11 -~ - reimbursement of the alleged overpaid taxes. 1-Jith the 1 at est t~ uJ. i nq of the Su pt�' e rn f~ the withholding agent of the Bureau of Internal Revenue lil-<e the PLDT in thi s case is .::' t~ eal pat~ ty in interest which ha s legal personality to in s titute a claim for refund considering that, as a withholding agent, it is equally liable for the wit h holdinq tax as the pt~incipal undet~ the Nation a l Intet' nal Revenue Code and that p �Jt~ s �J a nt to At~ticle XI <E> of the said Ct~ edit n~;weement, PLDT specifically agt�� eecl (toqethet�� w i t h P h ilqu e:n�� anl:er~ ) to s houldet~ any taxes that may be i mposed by the Philippine ~overn m ent on PEFCO. I n a similar case involving the same pat~ ties in CTA Case No. L� 37~i l. 9 9 2, we t~ en c:l en�e cl t h e same opinion. The fact that petitioner PLDT a mended it s petition fot~ t~ evif:.'I-'J in this case to include PEFCO as co-petitioner needs no furt he r e l aboration. WHEREFORE, judgment is rendered in favor of pet i tioner s. Respondent is hereby or dered to re f und or credit the petitioner PLDT the amount of P6, 7 3 1,63 8.63 erroneous ly pa id as withholding tax on its interest payments. _,

� DECISION CTR CASE NO. 4411 - 10 - SO ORDERED. Quezon City , J'l1etl���o J'l1anila, June 21.t, 1991. ,_.;&; \Q.. ~~ ERNESTO D. ACOSTA Pt��esicling JudgE' I CONCUR: S~LA DADIVAS-FA~LES Acting Associate Judge CE RT I F I CRT I 0 N this decision was reached after due consultation between the members of the Cout~ t of Tax nppeals in accot~ dance 1-'lith Section 13, At~ ticle VIII of the Constitution. ~(2,Q~ ERNESTO D. ACOSTA P t~ e s i d i n g ,hu::l q e Court of Tax Appeals � 4 8 �;