Sovereign Wealth Funds (SWFs) have become a significant investor in the global economy throughout the years and one study shows that there are now at least 40 SWFs in the world holding a combined total of billions, if not trillions, of US Dollars in assets.

An SWF is a state-owned fund, or a pool of money owned by a government, that is invested into various financial assets.  Take the case of a country that has excess budgetary reserves, instead of keeping the money in the country’s central depository bank, the country may opt to create an SWF and invest the money elsewhere for a greater or higher return.

As a government-owned fund, an SWF may enjoy tax benefits on its income earned, subject of course to the tax laws of the jurisdiction where the SWF’s investment is located.  In the case of the Philippines, the Tax Code accords tax exemption to certain investment income derived by foreign governments from investments in the Philippines. 

The Tax Code provision referred to here is Section 32(B)(7)(a) which provides that “Income  derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by: (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.”

While there is already a Tax Code provision providing for a tax exemption, it is common knowledge that most investee corporations in the Philippines would still require a tax exemption ruling (TER) and without such ruling, the investee corporation will almost always brush aside the exemption and withhold the applicable tax. 

In fact, even if there is already a jurisprudence holding that a Bureau of Internal Revenue (BIR) ruling should only be confirmatory in nature such that its absence should not operate to divest the taxpayer from entitlement to the relief or tax exemption, the practice of submitting a TER to the investee corporation in order for the latter not to withhold tax is still very prevalent.

It is understandable why investee corporations will require the foreign government, or the financing institution owned, controlled or enjoying refinancing from foreign governments, or the international or regional financial institution established by foreign governments, to present a TER.  As the investee corporations are based in the Philippines, they are the ones subject to a tax audit and they are the ones who have the burden to explain to the tax authorities why they did not withhold the applicable tax.  Unfortunately, and this is where the problem lies, getting a TER is no easy-task. 

First, getting a TER can be time consuming and expecting the TER to be issued in less than a month may be considered ambitious.  Second, getting a TER will necessarily entail costs as the foreign government, or the financing institution owned, controlled or enjoying refinancing from foreign governments, or the international or regional financial institution established by foreign governments, will likely hire or appoint a representative in the Philippines who will do the filing and application on their behalf.  Then, once the TER is secured, there is that unsettled issue of whether a TER should be revalidated every three (3) years.

Of course the foreign government, or the financing institution owned, controlled or enjoying refinancing from foreign governments, or the international or regional financial institution established by foreign governments, that is not able to present a TER to the investee corporation may apply for a tax refund.  The downside of a tax refund, however, is that it can be more difficult to obtain than a TER.

It is not a surprise therefore that the Philippines does not do well in terms of ease of doing business.  According to news reports, the Philippines slide 11 notches in the World Bank’s 2019 Ease of Doing Business report as the Philippines placed 124^th out of 190 economies.  Perhaps it is high time for the country’s government to take action so as to ensure that the tax exemption accorded to a foreign government, or the financing institution owned, controlled or enjoying refinancing from foreign governments, or the international or regional financial institution established by foreign governments, are given without much administrative burden.  

_{Kevin John D. Ampuan is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.}

_{This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.}

_{The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.}