CTA Case No. 4375 (Decision)

REPUBLIC OF THE PHILIPPIN COURT OF TAX APPEALS QUEZON CITY PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Peti tionl?r, - versus - C.T.A. CASE NO. 4375 COMMISSIONER OF INTERNAL REVENUE, Respondent. ~�:- ..��-- - -- - - - - - ,,\1 DEC I I 0N This is a claim for refund of allegedly erroneously remitted withholding tax on interest ,co' rresponding to the portion of the loan financed by Korean Export- Import Bank (KOEXIM Bank) cov ering the purc hase and importation of equipment as per the supply contrac t origin~lly entered into by RepubLic Telephone Company with Gold Star Tele- Elec:tt- ic Co.~ Ltd. (GST) of Korea. On Febr-uary 14, 1981, petit i oner- acquired by purchase the ~epublic Telephone Company (RETELCO). As a res ult, petitioner assumed the obligations und er which RETELCO was still bound to in a supply contract with Gold-Star Tele-Electric Co., Ltd. (GST) of involving the purchase of various equipment by RETELCO fo r its expansion/modernization program. 1

DECISION CTA CASE NO. 4375 - 2- The contract contains the following pertinent covenants: "Article 2 Prices The prices are g :l.ven in U.S. $ (US Dollar) and c over delivet-y C & F Manila Port as pe r INCOTERMS 1 953 and ONCOTERMS su ppl ement 1976 and services as wi ll as ~ny taxes, duties, f ees or any other charges which may from time to time be le,vied by the Government of the Country of Origin of the equipment from where the equipment will be exported, BUT DO NOT INCLUDE ANY TAXES, duties, fees or other charges which may be levied outside the Republic of l<orea . Such cha t-ges if they become due, ARE TO BE BORNE BY RETELCO. "The prices fo r equipment and s ervices specified in Annexes 'A' and � B' s ha 11 not exceed the amount of US Dollar Ni ne Million Seven Hundred Forty Thousand One Hu ndre d Eighty One (US$9,740,181.00) C 8< F Port of Man i la basis. :-::o~" (Emphasis .Supp l ied.) RET ELCO likewi se agreed to pay the GST 90% of the total contracted e quipmen t pri ce, not to exceed US$9,698,321.00, in 21 successive equal semi - annual installments over a 10-year� period, commenci ng 36 months after first delivery date of the contracted equipment. The p rinci pal obligation and its interest, were guaranteed by the Philippine Natio nal Bank (F'NB) and its su bsidia ry , National Investment �- 2

DECISION CTA CASE NO. 4375 - 3- Development Corporation (NIDC), as follows: "Art ie le 3. Payment e~ Guarantee of Paymen t 3.1.3 Payment of Interest X}�!X a) Regular Semi-Annual Interest RETELCO sha 11 pay GST intet-est at the rate of S ven Point Seventy Five (7.75) percent p.a. on the out~tandin g balance of the contracted e quipment price~ semi- annual ly, ev~ry June 15 and December 15 of c h year until the full amou nt s paid. xx:�~ � " XXX 3.2 Guarant~~ of Paym n 3.2.2 Lette~ of Gua r an tee National investment: and Development Corpor t ion (NIDC) s hall issue an irrevocable letter o f guarantee in favor of GST wi thJ.n one ( 1) month from validation of this contrac t ~ ~..,here the guaranto1~ ,unconditionally guarantees the payment in full of principal and interest on any of the foregoing pt-omissory notes when and as due in accordan~e with its terms. 3.3 Comfort Letter Within one (1) mon th afte r issu ance of the NIDC Lett r o f Guarantee~ the Philippine Nation 1 Bank (PNB) sha ll issue a Com f ort Letter in favor of GST st ~ ting th~t NIDC is a subsidiary of the PNB a nd committing itself to make cap.l ta c:ontritlut ion to NIOC ~~henever nE c:: ssary to allow the l etter to ful ly meet its commitment under above Ar-ticle ~.:L2 '' 3

DECISION CTA CASE NO. 4375 - 4- As a consequence of this contract. originally between GST and RETELCO~ the EXPORT-IMPORT BANK . OF KOREA granted GST an export loan to finance importations of RETELCO. Having bought RETELCO~ petiti oner paid interest on July 10, 1987, Octqber 13, 1987, Februa1~y 10, 1988 and July 10, 1988, amounting to US$599,835~� , � and remitted to the BIR the 15/. withholding ta}: on the entire interest payment on the loan, inc luding the portion of the contract finan ced by KOEXIM BANK, in the total amount of P1,864,458.01 (E:{hs. "F-Q") inclusive. Petitioner maintains that the withholding tax on the interest on the portion of the purchase pric e corresponding to seventy-six (76/.) per centum of th e loan e:{tende_d by KOEXIM BANK in the total amount of P1,416,988.09 were er-roneously paid and are not ta:�:able in the Phi 1 ippines. NO serious objections were raised by respondent on the facts of the case and instead raised the following legal issues in his memorandum: ( 1) Petitioner PLOT does not have the legal personality to institute this claim for ta x refund considering that the taxes on the interest due the Ph i 1ippine government are payable by Gold-Star Tele- Electric Co.~ Ltd.~ petitioner's creditor ��' 4

DECISION CTA CASE NO. 4375 - 5- in the Republic of l<o n:!a. He cited the case of G9JT1_fll.!..?_? .:i::.QIJ~C .....Q.f ......J_QJ~Y."'l<=!.l_. R~Ye:?.OPE?.. Y..?....� ........-....ErP.l; .t.~x-...... ..... ......!"JJ1d..............J3 a..'Y!. PJ.? ..J F'.b..i.l ................ ~-P P .i, og l~:l.~O_Ltf.~l; :t;t,tX:.i . 0 .9 ..J;::_p,r:pQf:C!t_:i,.,<;!D. ~ G. R. No. 66838 April 15~ 1988, 160 SCRA 560~ in support of his stand; ( 2) Considering that the RP-Korea Ta x Tt-e a ty was cone 1 uded for the pur-pose of avoiding a double t . :~. :-:atio n and the prevention of fiscal evasion, peti tionet- �failed t o prove that it is e ntitled to the tax refund for while it paid t he 15% withholding tax, nowhere from the records is the proof that its credi tm- GST has p ai d the corresponding ta:-: in Kor�ea on the same income that would indubitably s h ow a case of double t~xation. Ultimately~ however, the main issue is whethe r or not petitioner is enti tl,?d to a refund of the alleged erroneously paid ~~i thho 1 din~} ta :-: on interest in the light of the provisions of the RP- Korea Ta x Treaty in relation to the National Inten1al Revenue Code. The theor-y raised by the petitioner leans much on the ~elevant provisions of the RP -Kore a Tax Treaty, specifically on Article 11 which provides: "At-t icle 11 INTEREST 1. Interest arising :ln a Contt-,~cting State and paid to a resident of the other Con tt-ac ting State may be ta:-:ed in that other State. I l 4. Notwithstanding the provisions of paragraph 2 hereof, interest arising in a Con tt-ac ting State and p.nid to a re~;iden t

DECIS I ON CTA CASE NO. 4375 - 6- of the other Contracting State s h2.ll be ta:-~able only in that other State if the interest is paid in respect of ii > ~--�-��-1. g�_o. ���---m.~.c:f.�'-' ���� .__.Ql:!.? r.:.<:.'.o t.~g_cl_.... _or.: !.D.?t,.t.r:.~.g__, or a !;.r..~c:f_.;tt.....~(;J~JJ. cl!'? .c:f _~ ____g~,t�:\J:~n .t_~~Q. Pr. . JO$.LU:::e_c:1 .....PY. bb) in the case of Korea. thE! b a nk of Korea~ the E :.: port �-Import Bank of Korea, the Korea Exchange Bank x x x. 5. The term 'interest' as used in this Ar- tie le means income f r<Jm debt -c 1 aims of every kind~ whether or not carrying a right to participate in the debtor's profits~ and in particular~ i ncome from government securities and income from bonds or debentur es , inc 1 ud ing pt- E~ miums and prizes attaching to su c h securities~ bonds or debentures~ as:; ~-.Jell as income assimilated to income fr �om money lent by the ta:-:ation laws of the State in which th e income arises~ !..OJ.::J.J:!...c:li.Qg__ ,i, _fl.t~.r.:.I::!.?J;_. Q'l Qg f.~.r..r..g.9......-P.~.Y.m.~n_.t.. .. . ?..~.!.~.?. . x }�~ !{ �� In effect~ double taxation, sought to be avoided by the treaty~ allegedly occurs according to petitioner where petitioner pays in the Philippines 15% withholding tax on the intere st ~n the loan e:.:tended by the KOEXIM BANr'�� ~ while the same int erest ~ which are income of the party in Korea~ s hall also be ~ u b j@ e t to the corresponding ta:-: in Korea. The provisions of the RP-Korea Ta x Treaty are ' c 1ear in its import to avoid daub 1e ta :-:a tion by l 6

DECISION CTA CASE NO. 4375 - 7- taxing interest on income only once, and that is, only in the other state (Korea), particularly where such interest, as in this case, arises from "a loan guaranteed by the E:-:port --Import Bank of Korea". Seventy- six (76%) of the credit extended by GST to RETELCO (later PLDT) was financed . by the KOEXIM BANK. It is this 76% portion which petitioner � seeks to be spared from tax in the Phi 1ippines as it should be taxed only in Korea under the aforesaid treaty. While the loan was ex tended to GST and who therefore appears to be the creditor of RETELCO, it was known by the KOEXIM Bi\NK that the end user would be RETELCO who was i11porting the equipment for its modernization and eypansion. Thus, KOEXIM BANK certified that~ "the loan of US$6,623,000.00 has been granted to GST by KOEXIM BANK purposely to finan c e importations of RETELCO", (later assumed by PLDT) (E:-:hibit "C" ' p. 308, CTA Record) . This is consistent with the objectives of KOEXI M BANK which was established "to promote the sound development of the Korean economy and economic cooperation with foreign countries tht-ough the offering of loans, guarantees and other fin anc:ial facili1:ies." It also e:{tends credit to foreign governmemts, banks 7

DECISION CTA CASE NO. 4375 - 8- and co~po~ations for importing goods and technical services from Korea (Exhibit "R"~ p. 302, CTA Record) � In turn, the payment � by RETELCO (later PLOT) of the obligation was guaranteed by government institutions as the F'NB and the NIDC. Fittingly, respondent admits in his memo ~andum that "The loan secured from Goldstar Tele-Electric Co., Ltd. was gran�ted/financed by the Export-Import Bank . of ,,u Thus, it can be logically Korea x x /� established that the RETELCO loan was, in effect, a loan from a Korean government financial institution, the KOEXI M BANK. This sett l ed, ~~e find peti tione~' s a 1 ternati ve recour se to Section 28 of the National Internal F:evenue code to be also well:-founded. Section 28 enumerates the ~.Y.!.~J..l:!?...! .Q..IJ.?.. (8) Mi sce llaneou s items. - (A) Income received from their investments in the Philippines in loans, stocks, bonds, or other domestic securi t ies, or from interest on their deposits in banks in the Philippines by ( i) foreign gove~nments, ( i i) f inane ing institutions owned, controlled, or enjoying refinancing from them, and (iii) international or regional financing institutions established by governments. Turning on another point, respondent's reliance on the decision in Commissioner of 8

DECISION CTA CASE NO. 4375 - 9- Internal Revenue v. Procter &: Gamble Pf1C, et al. (G . R. No. 66838, 160 SCRA 560) cannot now stand in the 1 ight of the Supre me Court � s very recent en bane resolution (December 2, 1991) on the same case reversing the previous decision of the second di v i s ion. But let it be emphas ized :first that the aforesaid case is distinguishable from the present cas e . Here, ' the pe titioner may be a ~Ji thholding agent, but more importar.tl y ~ it was also contt- actually bound to shouJ.der and pay for the ta xes accruing from the interest on the loan . Under the test offered by petitioner, worthy of note~ which is that the real party in interest is the person who has the right to control and receive the fruits of the litigation~ i t is in fact the petitioner that stands to su �ff er the loss if this petition is denied or will be entit led to the gain if the result of the petition is otherwis The refore, petitioner can be considered a real party in interest in the present case. It appears to us that this test equals the standard on deter mining a real party in interest propound e d in the Procter and Gamble case which deemed to include a wholly owned subsidi ary withholding agent on the basis tha t the s uhbsidiary ( P I!~ G - Phi ls. is an 9

DECISION CTA CASE NO. 4375 - 10 - agent which is the parent-- stockholder of P & G �-- USA). The petitioner in the present case, however~ can lay claim to an equ~l if not more than substantial stake to the fruits of the action, having bor-ne the taxes in the Phi 1 i ppines pursuant to the contract. Veri 1y, pe!ti tioner.- in this case can be considered a "ta:-:payer" as the term has been expou~ded in t' h~ revised Procter and Gamble case. Neither can we give support to a seeming obstacle being pushed by r-espondent to bar- petitioner-'s claim .-which is supposedly the pr-oof of paymr::!n t by GST of the cor-r-es;pondinq ta:-: in t<or-ea. I t is not for- the r-e!sponden t to impose administr-ative inter-fer-ence wher-e tr-eaty commitments between signator-y states are .involv e d. Compliance by the other- state to its treaty commi tme nt is entitled to as much defer-ence as the comp 1iance by the Phi 1ippines. Nowher-e is i t r-ef 1ec ted in the pr-ovisions of the subject ta:-: tr-eaty that ta:-:es need be paid by the r-esident of the othet- contr-acting state in said state before t. a~: spar�eness as promised ther-ein can be c 1ai med. The tr- eaty clear ly mandates that "inter-est ar-ising in a Contr-acting State and paid to a r-esiden t o �f other� Contr-acting State !?..h.~..lJ._..t:le_....tP.;�: af::l .~ _t;!_____go1y___ ,!,o 10

DECISION CTA CASE NO. 4375 - 11 - t.b..e:t ....9.th.g.r......P..:t..~.t..~ if the interest is paid in respect of ,,.,. ,,,.. :{ a loan made~ guarateed or insured by x x x in the case of Korea~ x x x the Export-Import Bank of Korea x :{ :{. " (Unde rsc oring supplied). In ta:{ treaties between states used to avoid double taxation~ the commitment by the .parties mainly involved the allowance of a matching credit or tax relief~ or re�ciprocal actions. The conclusion and ratification of the tax tre .aty is enough to leave an assurance to the parties that the commitment wi 11 be honored. The creation of administrative requirements that will not faci lita te transactions but instead make for excessive routines wil l defeat another purpose of ta x t~~eaties whi c h is the impr-ovement of commerce. f1ore so~ when we take into account the peculiar relationship of the parties incidental to the transaction discussed here which are not in a su bsidiary-parent r elationshi p as in the Proct,er and Gamble cast! but are really separate entities. Finally it may not be amiss to say that from another angle, petitioner is also correct to infer that if under the relevant pr�ovisions of Section 28 of the National Internal Rf~venue Code income on loans granted by a financ ial institution of a 11

.. DECISION CTA CASE NO. 4375 - 12 - foreign government such as the KOEXIM BANK is express! y excluded from gross income and exempted from ta:<ation, there is no necessity of showing that such income has been subjected to tax in ~:: area. WHEREFORE, judgment is renderecJ in favor of petitioner. Respondent is hereby ordered to refund or credit to p�etitioner the amount of P1,416,988.09 erroneously paid as withholding tax on its interest payments. SO ORDERED. Quezon City, Metro Manila, January 7, 1992. ~~Q.~ ERNESTO D. ACOSTA Associate Judge I CONCUR: /-......... C. ROAQUIN Judge 12

DECISION CTA CASE NO. 4375 - 13 - CERTIFICATION I hereby certify th~t this decision was reached after due consultation between the members of the Court of Tax Appeals in accor- dance ~~i th Section 13~ Article VIII of the Constitution. ROAOUIN Judge Appeals ,� 13