Amendment to Act No. 1189, the Internal Revenue Code of 1904

December 22, 2005 ITAD RULING NO. 164-05 Article 11-Philippines-Korea-Philippines-Japan BIR Ruling ITAD No. 099-03; 131-98; 092-03. Kepco Ilijan Corporation 18th Floor Citibank Tower 8741 Paseo de Roxas Salcedo, Makati City Attention : Ms. Guen Bae Seo Guillermo O. Dabbay, Jr. Ricardo A. Galano III Gentlemen : This refers to your letters dated March 14, 2002 and January 6, 2005, requesting confirmation of your opinion: (1) that the interest paid by KEPCO Ilijan Corporation (KEILCO) to Export-Import Bank of Korea (K-EXIM) under the K-EXIM) Loan Agreement is exempt from Philippine income tax pursuant to Article 11 of the Philippines-Korea tax treaty, and; (2) that the interest arising from the portion of the loans obtained by KEILCO from Japanese commercial banks, particularly: a) Export-Import Bank of Korea; b) The Bank of Tokyo-Mitsubishi, Ltd. and c) Sumitomo Mitsui Banking Corporation under the JBIC Loan Agreement which is duly guaranteed by the Japanese Ministry of International Trade and Industry (MITI), 1 is also exempt from tax pursuant to the Philippines-Japan tax treaty: It is represented that KEILCO is a corporation duly organized and existing under the laws of the Philippines; that it is registered with the Board of Investments (BOI) on a pioneer status per Certificate of Registration No. 98-010 dated February 27, 1997; that on November 10, 2000, KEILCO entered into the following loan agreements on which it will pay interest to its lenders from time to time: (1) the K-EXIM Loan Agreement with K-EXIM wherein KEXIM, a statutory juridical financing institution organized and existing under the laws of Korea with office address at, 16-1, Yoido dong, Young deungpu-gu, Seoul 150-010, Korea, having its branch office at Tokyo, Japan, undertakes to make loans to KEILCO in art aggregate principal amount of $69,518,000.00 and 1(2) the Japan Bank for International Cooperation (JBIC Loan Agreement) with KEILCO as Borrower and the following as Co-Financing Lenders: a) Japan Bank for International Cooperation; b) The Bank of Tokyo-Mitsubishi, Ltd., a foreign corporation duly organized and existing under the laws of Japan with office address at 7-1, Marunouchi, 2-chome, Chiyoda-ku, Tokyo 100 8 388, Japan; c) Sumitomo Mitsui Banking Corporation, a foreign corporation duly organized and existing under the laws of Japan with office address at Yurakucho 1-chome, Chiyoda-ku, Tokyo 100-0006, Japan; d) BNP Paribas, Tokyo Branch, a foreign corporation duly organized and existing under the laws of France with branch office address at 22/F Tokyo Sankei Building, 1-7-2, Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan; e) Citibank, N.A., Tokyo Branch, a foreign corporation duly organized and existing under the laws of United States of America with branch office address at 2-20, Akasaka 5-chome, Minato-ku, Tokyo 107-6105, Japan. that these international banks are not registered either as a corporation or as a partnership licensed to do business in the Philippines per, certifications issued by Securities and Exchange Commission all dated October 17, 2001; and that the loans shall be paid in accordance with the following terms: For the K-Exim Loan Agreement Article 3.01. Repayment of Principal The Borrower shall pay to K-EXIM the principal amount of the K-Exim Loan in 24 equal installments on each payment date, commencing with subject, to Section 4.01(b) of the Agreement the First payment date. The amount of each installment shall be equal to one-twenty fourth of amount of the K-EXIM Loan outstanding immediately prior to the first payment date. The first Payment Date shall occur no later than October 23, 2002. SaDICE For the JBIC Loan Agreement Payment shall be made in twenty four (24) installments, in accordance with Annex A of the Agreement, the first of which is scheduled to be made on October 23, 2002, and the last payment scheduled to be made on April 23, 2014. It is further represented in your letter dated June 11, 2003, Mr. Kensuke Saito, Second Secretary of the Japanese Embassy certified that ". . . the Japanese Ministry of Economy Trade and Industry (METI) is an agency of the, Japanese government and is responsible for trade insurance. However, the function of issuing trade insurance was transferred to the Nippon Export and Investment Insurance (NEXI) which is still an agency of a financial institution wholly owned by the Japanese government ."; that the portion of the JBIC Loan Agreement which is covered by the "MITI Insurance Policy" is now insured with Nippon Export and Investment Insurance (NEXI) as a result of the transfer of the trade insurance functions of MITI (an agency of the Japanese government responsible for trade insurance) to NEXI, as certified by the Japanese, Embassy in the aforementioned letter; that NEXI's guarantee of portions of the JBIC Loan are detailed in the relevant policies issued to evidence such guarantee, stated as follows: Date Date of Insurance Name of Policy No. Prepared Agreement was Beneficiary concluded 10-209726000-00-800042 April 2, December 1, 2000 Bank of Tokyo 2001 Mitsubishi, Ltd. 10-207153000-00-800045 April 2, December 1, 2000 Sumitomo Mitsui 2004 Banking Corporation and that, while the JBIC Loan Agreement was signed on November 10, 2000, prior to the creation of NEXI, the insurance policies described above show that NEXI guarantee covers the period from December 1, 2000, as a consequence of its assumption of MITI's trade insurance functions. Based on the above representations; it is your opinion that the interest paid by KEILCO under the K-EXIM Agreement and the JBIC Agreement for the loans extended by the other international banks which were guaranteed by MITI is exempt from Philippine income tax, pursuant to Article 11 of the Philippines-Korea and Philippines-Japan' tax treaties, respectively. In reply, please be informed as follows: 1. On the Export-Import Bank of Korea Article 11 of the Philippines-Korea tax treaty provides: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 percent of the gross amount of the interest if the interest is paid in respect of public issues of bonds, debentures or similar obligation; and HDICSa b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 hereof, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines; registered, with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Korea, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraph 2 hereof, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if the interest is paid in respect of: (i) a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or (ii) a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (aa) in the case of the Philippines, the Central Bank of the Philippines, (bb) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea , the Korea Exchange Bank and (cc) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of the Contracting States. 5. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises, including interest on deferred payment sales. xxx xxx xxx" Based on the foregoing, interest arising in the Philippines and paid to a resident of Korea may be taxed in the Philippines at a rate not to exceed 10% if the interest is paid in respect of public issues of bonds, debentures or similar obligation, or if the company paying such interest is registered with the Philippines Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines. On the other hand, such interest is exempt from Philippine income tax if the same is paid in respect of a bond, debenture or other similar obligation of the government of that State or a political subdivision or local authority thereof, or when the same is paid on a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by (1) in the case of the Philippines, the Central Bank of the Philippines, (2) in the case of Korea, the Bank of Korea, the Export-Import Bank of Korea , the Korea Exchange Bank and (3) other lending institutions as may be specified and agreed in letters of exchange between the competent authorities of Philippines and Korea. AcISTE Such being the case, interest income earned by K-EXIM from its loan agreement with KEILCO is exempt from Philippine income tax. 2. On the Bank of Tokyo-Mitsubishi, Ltd. and the Sumitomo Mitsui Banking Corporation Article 11 of the Philippines-Japan tax treaty: "Article 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "xxx xxx xxx 3. Notwithstanding the provisions off paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. (emphasis supplied) "xxx xxx xxx" Pursuant to the aforequoted provisions interest arising in the Philippines and paid by a company registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment shall be subject to tax at the rate of 10%, based on the gross amount thereof. Furthermore, interest arising in the Philippines with respect to debt-claims guaranteed or indirectly financed by the Government of Japan or by any financial institution wholly owned by Japan, are exempt from Philippine income tax. Accordingly, interest income of the Bank of Tokyo-Mitsubishi Ltd. and Sumitomo Mitsui Banking Corporation from the JBIC Loan Agreement shall be treated for tax purposes as follows: a. The portion of the loan guaranteed by MITI, and subsequently, NEXI shall be exempt from Philippine income tax, and consequently withholding tax, since, as represented, MITI is part of the government of Japan and NEXI, to which MITI transferred function of trade insurance service to export credit agency and investment insurance service is a financial institution wholly owned by the Japanese government. b. The portion of the loan which is not covered by the NEXI guarantee shall be subject to 10% preferential tax rate, based on the gross amount of such interest considering that KEILCO is registered with the BOI on a pioneer status. Moreover, the K-EXIM Loan Agreement and the JBIC Loan Agreement executed between KIELCO and the aforementioned financial institutions shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. ( BIR Ruling No. ITAD 128-00 dated September 2000 ). This ruling is issued on the basis of facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue Footnotes 1. MITI was organized as the Ministry of Economy, Trade and Industry (METI), and the function of issuing trade insurance was transferred to Nippon Export and Investment Insurance (NEXI)