BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

TAX EXEMPTION

Question No. 11: (1992)

1) The President of the Philippines and the Prime Minister of Japan entered into
an executive agreement in respect of a loan facility to the Philippines for Japan
whereby it was stipulated that interest on loans granted by private Japanese
financial institutions t private financial institutions in the Philippines shall not
be subject to the Philippine income taxes.

Answer:

Yes. The tax exemption is valid because an executive agreement has the force
and effect of a treaty under the provision of the Revenue Code. Taxation is subject
to International Country.

Alternative Answer:

a) The act of tax exemption is an act of taxation which is inherently legislative.

Therefore, a mere executive agreement cannot provide for a tax exemption.
b) No. under the NIRC, for interest on investment in the Philippines in loans to be
exempt from taxation, such investment must have been made by foreign
government-owned or controlled financing institutions or international
financing institutions established by governments. In the case at bar, the loans
would be granted by private Japanese financial institutions and therefor, the
interest thereon would not be exempt from taxation.

2) In a loan agreement between the Central Bank of the Philippines (as borrower)
and private international bank (as lender). It is stipulated that all payments of
interest by the Central Bank to the lenders shall be made free and clear form all
the Philippines taxes which may be imposed thereon.

Is the stipulation valid?

 BAR EXAMINATION QUESTIONS AND ANSWERS IN TAXATION

Answer:

No. the act of tax exemption is an act of taxation which is inherently legislative
and, therefore, a mere executive agreement without concurrence by Congress
cannot provide for a tax exemption.

Alternative Answer:

It is valid. The stipulation in the agreement that the lender “shall be made free and
clear” from all Philippine taxes, a simply meant that the Central Bank will assume
the tax liability which is not contrary to law, morals, good customs, public order or
public policy.