Philippine Long Distance Telephone Company and Private Export Funding Corporation vs. “ vs. ~ Commissioner of Internal Revenue

DECISION

-e- Fiber-optic submarine cable system connecting the USA, Guam and the Fhilippines and other related Fhilippine inland transmission system.

The aforesaid credit agreement is guaranteed by the Export Import Bank of the United States, (EXIMBANK for short), a wholly owned subsidiary of the United States government. The guarantee issued by EXIMBANK subsisted when the credit agreement was assigned by FPEFCO to Irving Trust Company as per Motice of Assignment dated February 11, 1988, (Exh. "B-4"), The assignment was approved by the Central Bank of the Philippines in a letter dated April 8, 1988 (Exh. "B-S").

For the period December 7, 1987 to August 10, 1988, petitioner withheld and remitted to the respondent a £0% tax on interest payments to FEFCO and for the period February 18, 1989 to June 13, 1989, a 15% tax on interest payments to Irving Trust Company. The total amount of tax withheld and remitted is FG, 731,638.63 broken down as Follows (Exh. "B-6")s Rate OR.NO, Interest Paid Tan Withheld = Phil. Peso

(UB $) (US $)

12-10-87 B-12955304 $ 71,660.60 $ 14,336.12 P 297,116.09 8-10-88 —B-5634143 476, 387.52 95, 229. 50 2,201, 780, 36 2-10-89 B-14210350 668, 413. 42 100, 262. 01 2,208, 980. 98 6-13-89 B-17039110 687, 491,87 103, 123.78 2,223, 761.20 $1,903,973,41 $312,949.41 6, 731,628.63 4'7&

- 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~ filed 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 it 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 sonal 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: Not w i t h s t and i n g p at' a g t' a ph s ( 1) ' an d < :'3 ) i n t e t' e s t d e t' i v e d b y - 43(;

(a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the Fhilippines, the Federal Reserve Bank of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States, and such oather institutions of either Contracting State as the competent authorities of both Contracting States may determine by mutual agreement), or

(b) A resident of ane of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof, shall be exempt from tax by the other Contracting State. xxx" (Underscoring supplied).

A critical analysis of the aforequoted provisions of the tax treaty will show that it exempts from taxation interest derived by one of the Contracting States in two cases, namelys

(1) When the interest is derived by the other contracting state itself or an instrumentality therof which includes among others in the enumeration, the Central Bank of the Fhilippines, the Federal Reserve Banks of the United States, the Export-Import Bank of the United States; and

(2) When the interest is derived by a resident of one of the contracting states with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality 481

- 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 m en 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 m en 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 a reimbursement before the actual release is made. Even on the matter of stephen abn and cancellation {Article VII) of the utilization of this credit by the borrower, it is EX IMBANK which has the authority to make the suspenion or cancellation. These facts distinguish the credit agreement in this case from the credit agreement entered into by and between Atlas Consolidated Mining and Development Corporation (Atlas for short) and Mitsubishi Metal Corporation of Japan in the case of Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, et al., G.R. No. 34908, January 22, 1990, 181 SCRA 214, cited by respondent. In the latter case, a credit agreement was entered into by and between Atlas and Mitsubishi. Another contract of loan was entered into by and between Mitsubishi and EXIMBANK of Japan. As found by the Supreme Court the latter contract is entirely different from the first contract. It is complete in itself, does not appear te be stuppletory or collateral to another contract and is, therefore, not to be distorted by other consideration altuinde. In the instant case, as discussed above, there is only one contract involved embodying the rights and dbligations 6f all the parties, including EXIMBANKH.

The fact that there is another contract between 430 ..

- 8 - PEFCO and EXIMBANK doe s not matt et~ as thi s made a s to the ct~ ed it 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 is, 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 it to say that in Commis s ionet~ of Intet~ nal Revenue vs. Pt~ octot~ & Gamble Philippine Manu factur 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~ action 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 ity to claim f ot~

DECIS 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 •Ja nt to At~ticle XI <E> of the said Ct~ edit n~;weement, PLDT specifically agt··eecl (toqethet·· wit 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 erroneou s ly pa id as withholding tax on its interest payments. _,

I CONCUR:

STELLA DADIVAS—FARRALES

Acting Associate Judge CERTIFICATION I hereby certify that this decision was reached after due cansultation between the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution.

Cre WR. (hus Po ERNESTO D. ACOSTA Fresiding Judge Court of Tax Appeals 486