San Miguel Corporation

January 15, 2008 BIR RULING [DA-010-08] Sec. 28; RR 13-00; RMC 46-77; BIR Ruling No. 015-2005 & 164-95; ITAD Ruling No. 179-02 & 099-03 San Miguel Corporation San Miguel Head Office Complex No. 40 San Miguel Ave. Mandaluyong City Attention: Mr. Alfredo R. Villacorte Vice-President and Tax Manager Gentlemen : This refers to your letter dated November 7, 2007 requesting for clarification on the applicable tax rates on the resulting interest payments and other fees payable under a Term Facility Agreement (the "Agreement"). It is represented that under the Agreement, the Lenders agree to make available to San Miguel Corporation (SMC) a Dollar term loan facility in the aggregate amount not exceeding USD1,200,000,000; that each loan to be made under the facility shall be evidenced by a promissory note in favor of the Facility Agent for and on behalf of the Lenders to be issued by the Company to the Facility Agent; that SMC shall repay the loans in installments by paying an amount equal to one-seventh (1/7) of the loans borrowed starting from the 24th month from the date of the Agreement; that SMC shall pay the Lenders interest which shall start on the drawdown date or on the last day of its preceding interest date and each interest period shall be for a period of 1, 3 or 6 months ("Interest Period") as SMC may select; that the rate of interest on each advance (portion of the loan released) is the rate per annum to be the aggregate of the applicable margin and LIBOR (London Inter-Bank Offer Rate) in respect of such Interest Period; that all payments by SMC shall be made to the Facility Agent at such office or bank as it may notify SMC and the Lenders for this purpose; that the Facility Agent will make the payments to the specific Lender; that for services rendered by the Facility Agent, ( i.e., Mizuho Corporate Bank Ltd., a corporation duly organized and existing under the laws of Singapore) acting as the agent of the Finance Parties under and in connection with the Agreement, SMC shall pay an agency fee in the amounts and on the dates agreed on by the parties; that for services rendered by the Arrangers, SMC shall pay to the Facility Agent for the account of the Arrangers an Arrangement Fee in such amounts and on the dates agreed upon by the parties; and that under the Agreement, all payments made by SMC shall be made free and clear of and without deduction for or on account of any present or future taxes. HSCATc In connection therewith, you are requesting clarification on the tax consequences of the foregoing transactions, as follows: 1. On the Interest Payments A. Are the interest income of the non-resident foreign corporations whose countries of residence do not have existing Tax Treaties with the Philippines subject to 20% final withholding tax under Section 28 (B) (5) of the 1997 Tax Code? Original Lenders whose countries of domicile are Hongkong and Taiwan: Lenders Without/Not Through Facility Office in the Philippines Country of Residence (1) CITIC Ka Wah Bank Limited Hongkong (2) AOZORA Asia Pacific Finance Limited Hongkong (3) The Hongkong and Shanghai Banking Corporation Limited, Hongkong Hongkong Office (4) Mega International Commercial Bank Co., Ltd. Offshore Taiwan Banking Branch (5) Taiwan Cooperative Bank, Offshore Banking Branch Taiwan (6) E. Sun Commercial Bank, Ltd. Offshore Banking Branch Taiwan (7) Cathay United Bank Taiwan (8) Mizuho Corporate Bank Ltd. Hongkong (9) Sumitomo Mitsui Banking Corporation Hongkong B. Are the interest income of the non-resident foreign corporations located in countries which have tax treaties with the Philippines subject to the preferential tax rates as provided under the applicable Tax Treaty subject to the condition that said non-resident foreign corporations do not have a permanent establishment in the Philippines to which said interest income is effectively connected? Lenders Without Facility Office in the Philippines Country of Residence (1) DBS Bank Ltd. Singapore (2) Maybank International (L) Ltd. Malaysia (3) Standard Chartered Bank United Kingdom (4) Malayan Banking Berhad Singapore (5) Australia and New Zealand Banking Group Limited Singapore C. Are the interest income of banks acting through their respective branches located in another country subject to the tax treaty rates of the parent company following the principle that the branch is not a separate or distinct entity from the parent company? Lenders With Branch as Facility Offices Jurisdiction of Jurisdiction of Facility Office Parent Company (1) Malayan Banking Berhad Hongkong Malaysia (2) The Bank of Tokyo-Mitsubishi UFJ Ltd., Malaysia Japan Labuan Branch (3) Bank of China, Grand Cayman Branch Grand Cayman China (4) Bayerrische Hypo-Und Vereinsbank AG, Singapore Germany Singapore Branch IcSHTA D. Are the interest income of banks acting through their Manila Offshore Banking Unit subject to 10% final withholding tax pursuant to the provision of Section 27 (A) (4) of the Tax Code? Lenders With OBUs as Facility Offices Jurisdiction of Jurisdiction of Facility Office Parent Company (1) Calyon, Manila Offshore Branch Philippines France (2) The Bank of Tokyo-Mitsubishi UFJ Ltd., Philippines Japan Manila Branch (3) Bank of China, Manila Branch Philippines China (4) The Hongkong and Shanghai Banking Philippines Hongkong Corporation Limited, Philippines Office (5) ABN AMRO Bank N.V., Manila Offshore Philippines Netherlands Banking Unit (6) Citibank N.A., Philippines Branch Philippines USA E. Are the interest income of the Philippine banks enumerated below subject to 10% final withholding tax under Section 2.57-1 (G) (4) of Revenue Regulations No. 2-98? Lenders Jurisdiction of Facility Office (1) Banco de Oro-EPCI Inc. Philippines (2) BDO Private Bank Inc. Philippines (3) Maybank Philippines Inc. Philippines (4) Bank of the Philippine Islands Philippines (5) Rizal Commercial Banking Corporation Philippines (6) Land Bank of the Philippines Philippines (7) Chinatrust (Philippines) Commercial Bank Corporation Philippines Are the Agency Fees paid to the Facility Agent, Mizuho Corporate Bank Ltd., a non resident foreign corporation exempt from Philippine income taxes since it is a non-resident foreign corporation which renders services outside of the Philippines? Under the Agreement, the Facility Agent is authorized by the Finance Parties to take such action on its behalf and to exercise such powers and perform such duties as are expressly delegated to the Facility Agent by the terms of the Agreement and other related documents. The duties of the Facility Agent are solely mechanical and administrative in nature. This includes the duty to receive requests for advance and other notices arising under the Agreement. These services are performed by the Facility Agent through its office in Singapore. 3. On the Arrangers' Fees Are the Arrangers' Fees paid by SMC to the Arrangers, which are non-resident foreign corporations, exempt from Philippine income tax under Section 28 (B) (1) of the 1997 Tax Code? Under the Agreement, for services rendered by the Arrangers, SMC shall pay to the Facility Agent for the account of the Arrangers an Arrangers' Fee in such amounts and on the dates agreed upon by the parties. The Arrangers act as arranger with respect to the financing of the loan and will manage all aspects of the syndication in consultation with SMC, including the timing of all offers to potential Lenders, the acceptance of commitments, and the determination of the amount offered and the compensation provided. For these services, SMC shall pay the Arrangers through the Facility Agent an "arrangement fee" in the amounts agreed upon. 4. On the Tax Base to be Used in Computing Withholding Taxes What is the Tax Base to be used in computing the withholding taxes on the interest payments to be made to the Lenders which include OBUs and foreign banks (except for branches of foreign banks located in the Philippines)? Should it be based on the actual amount of the interest without considering as additional taxable income the tax assumed by the borrower pursuant to Revenue Memorandum Circular (RMC) No. 46-77 and BIR Ruling No. 15-2005 dated August 23, 2005? Under the Agreement, all payments made by SMC shall be made free and clear of and without deduction for or on account of any present or future taxes. IHAcCS In reply, please be informed as follows: On the Interest Payments (A) As a rule, the interest payments on foreign loans made to non-resident foreign corporations whose countries of residence do not have existing Tax Treaties with the Philippines are subject to 20% final withholding tax under Section 28 (B) (5) (a) of the 1997 Tax Code, as amended, which provides: "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986." Currently, the Philippines has no outstanding tax treaties with Hongkong and Taiwan. As such, the interest payments to the above enumerated Original Lenders whose countries of domicile are Hongkong and Taiwan are subject to 20% final withholding tax on the amount of interest paid. (B) Interest payments on loans made to non-resident foreign corporations located in countries where Philippines has tax treaties with are subject to the preferential tax rates as provided under the applicable Tax Treaty. This rule applies notwithstanding the fact that the non-resident foreign corporations have offices in the Philippines (either a branch or an OBU) provided that said Philippine offices have no participation in the Facility either by signing as parties thereto or by contributing funds as part of the Facility. In ITAD Ruling No. 179-02 dated October 15, 2002, the BIR ruled that "considering that said interest payments, as herein represented, are not effectively connected to its Offshore Banking Unit (OBU) and that the said OBU of Barclay has no participation whatsoever in the herein Bridge Loan as shown in the Loan Agreement itself and the proof of inward remittance submitted, therefore, this Office is of the opinion and so holds that the interest payments of Maynilad Water to Barclay are subject to the preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 10 of the RP-UK tax treaty." [Emphasis supplied] SDaHEc Applying the above pronouncement, the interest payments made by SMC to the above enumerated Lenders who are non-resident foreign corporations located in countries where Philippines has tax treaties with shall be subject to the preferential rates as provided in the applicable Tax Treaties considering that said lenders do not have permanent establishments in the Philippines to which said interest income is effectively connected, to wit: (1) DBS Bank Ltd., Malayan Banking Berhad and Australia and New Zealand Banking Group Limited (RP-Singapore Tax Treaty) Article 11 of RP-Singapore Tax Treaty provides: "Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may be taxed in the Contracting State in which it arises, according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. . . ." xxx xxx xxx 7. Notwithstanding the provisions of paragraph 2, (a) interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured, by such institutions as are specified and agreed in letters exchanged between the competent authorities of the Contracting States; . . ." (Emphasis supplied) (2) Standard Chartered Bank (RP-United Kingdom Tax Treaty) Article X of the RP-United Kingdom Tax Treaty provides: "ARTICLE X INTEREST 1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. SCHATc 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest." (3) Maybank International (L) Ltd (RP-Malaysia Tax Treaty) Article 11 of the RP-Malaysia 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 that other State. 2. However, such interest may 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 15 per cent the gross amount of the interest." (emphasis supplied) Based on the above-quoted provisions of the RP-Singapore, RP-United Kingdom and RP-Malaysia Tax Treaties, the preferential tax rate shall apply if the Lender is the beneficial owner of the interest received. Since the foregoing creditor banks are the beneficial owners of their respective interests arising therefrom, the interest paid to them shall be subject to income tax at the preferential rate of 15% as explained above, notwithstanding the presence of a Philippine office since said Philippine office did not have any participation in the subject Agreement. In summary, the applicable tax rates for the following banks are as follows: Name of Bank Jurisdiction of Treaty Rate Facility Office 1. DBS Bank Ltd Singapore 15% 2. Maybank International (L) Ltd Malaysia 15% 3. Standard Chartered Bank UK 15% 4. Malayan Banking Berhad Singapore 15% 5. Australia and New Zealand Banking Group Singapore 15% Limited (C) In case of banks acting through their respective branches located in another country, the applicable tax treaty rates of the parent company should apply following the principle that the branch is not a separate or distinct entity from the parent company. SHDAEC In ITAD Ruling No. 099-03 dated July 16, 2003, the BIR ruled that the mere fact that the participation of a parent company as lender under a loan agreement is made through a branch does not obviate the operations of the provisions of the tax treaty with the residence country of the former since a branch has no distinct and separate juridical personality from that of its parent company. Thus, in a case involving a loan contracted by a Philippine corporation with the Hongkong branch of a bank organized and existing under Austrian law, the BIR, in applying the provisions of the RP-Austria tax treaty, ruled that: "The fact that the loan was secured through the Hong Kong branch of LBA (the Austrian parent company) does not affect the tax treatment of interest earned therefrom, considering that a branch has not distinct and separate juridical personality from that of its mother company." [BIR Ruling No. 164-95 dated October 23, 1995] Applying the above pronouncement, the interest payments made by SMC to the following Lenders shall be subject to the preferential rates as provided in the applicable Tax Treaties of their respective parent companies, to wit: (1) Malayan Banking Berhad (RP-Malaysia 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 State. (2) However, such interest may 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 15 per cent the gross amount of the interest. CScaDH (2) The Bank of Tokyo-Mitsubishi UFJ, Ltd., Labuan Branch (RP-Japan Tax Treaty): ARTICLE 11 (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. ADHaTC (2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; (b) 15 per cent of the gross amount of the interest in all other cases." (3) Bank of China, Grand Cayman Branch (RP-China 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 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 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. (4) Bayerische Hypo-und Vereinsbank AG, Singapore Branch (RP-Germany 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 State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: (a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or ITSacC (iii) in respect of public issues of bonds, debentures or similar obligations. In summary, the interest payments made by SMC to Lenders whose participation under the Agreement was coursed through their branch offices are subject to the following preferential tax rates under the applicable tax treaties: Lenders with Branch as Jurisdiction Jurisdiction Tax Treaty Tax Treaty Facility Offices of Branch of Parent Rates Office Company (1) Malayan Banking Hongkong Malaysia RP-Ma lay sia 15% Berhad (2) The Bank of Tokyo- Hongkong Japan RP-J ap an 15% Mitsubishi UFJ Ltd., Labuan Branch (3) Bank of China, Grand Grand China RP-C hi na 10% Cayman Branch Cayman (4) Bayerische Hypo-Und Singapore Germany RP-Ge rm any 10% Vereinsbank AG, Singapore Branch (E) In case of banks acting through their Manila Offshore Banking Unit, the interest payments are subject to 10% final withholding tax pursuant to the provision of Section 28 (A) (4) of the Tax Code which provides: "(4) Offshore Banking Units. The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) for foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income." DaHISE Thus, interest payments to the following Original lenders shall be subject to 10% final withholding tax: Lenders Jurisdiction of Jurisdiction Applicable Applicable Facility Office of Parent Tax Laws Tax Rate Company (1) Calyon, Manila Philippines France Philippines 10% Offshore Branch (2) The Bank of Tokyo- Philippines Japan Philippines 10% Mitsubishi UFJ, Ltd., Manila Branch (3) Bank of China, Manila Philippines China Philippines 10% Branch (4) The Hongkong and Philippines Hongkong Philippines 10% Shanghai Banking Corporation Limited, Philippines Branch (5) ABN AMRO Bank N.V., Philippines Netherlands Philippines 10% Manila, Offshore Banking Unit (6) Citibank N.A., Philippine Philippines USA Philippines 10% Branch (G) In case of Philippine banks, the interest payments are subject to 10% final withholding tax under Section 2.57-1 (G) (4) of Revenue Regulations No. 2-98, as amended. AaDSTH Lenders Jurisdiction Jurisdiction Applicable Applicable of Facility of Parent Tax Laws Tax Treaty Office Company Rate (1) Banco de Oro-EPCI Inc. Philippines N/A Philippines 10% (2) BDO Private Bank Inc. Philippines N/A Philippines 10% (3) Maybank Philippines Inc. Philippines N/A Philippines 10% (4) Bank of the Philippine Islands Philippines N/A Philippines 10% (5) Rizal Commercial Banking Philippines N/A Philippines 10% Corporation (6) Land Bank of the Philippines Philippines N/A Philippines 10% (7) Chinatrust (Philippines) Philippines N/A Philippines 10% Commercial Bank Corporation On the Agency Fees Paid to Facility Agent As represented, under the Agreement, the Facility Agent is authorized by the Finance Parties to take such action on its behalf and to exercise such powers and perform such duties as are expressly delegated to the Facility Agent by the terms of the Agreement and other related documents. The duties of the Facility Agent are solely mechanical and administrative in nature. This includes the duty to receive requests for advance and other notices arising under the Agreement. These services are performed by the Facility Agent through its office in Singapore. Considering that the obligations of the Facility Agent under the Agreement are performed outside of the Philippines, the Agent's Fee paid by SMC to it shall not be deemed sourced within the Philippines and hence, are exempt from Philippine income tax under Section 28 (B) (1) of the 1997 Tax Code. On the Arrangers' Fees It is represented that under the Agreement, for services rendered by the Arrangers, SMC shall pay to the Facility Agent for the account of the Arrangers an Arrangers' Fee in such amounts and on the dates agreed upon by the parties. The Arrangers act as arranger with respect to the financing of the loan and will manage all aspects of the syndication in consultation with SMC, including the timing of all offers to potential Lenders, the acceptance of commitments, and the determination of the amount offered and the compensation provided. For these services, SMC shall pay the Arrangers through the Facility Agent an "arrangement fee" in the amounts agreed upon. Based on the foregoing definition, the arrangers' fees are not interest payments but are actually charges for professional services rendered by the Arrangers to SMC arising from the Agreement. Said fees, therefore, are not subject to the final withholding tax imposed on interest payments. Instead, said fees may be considered as payment for services rendered outside of the Philippines and hence, not subject to Philippine income tax. EaTCSA Interest is defined under revenue regulations "as payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of money during the term of the loan, as well as for his detention of money after the due date for its repayment." (Revenue Regulations No. 13-00 dated November 20, 2000) As applied in this case, the fees received by the Arrangers are not for the forbearance of money but compensation for services rendered by the Arrangers and for making available a credit line to SMC. As a result, said fees which are paid for services rendered outside of the Philippines, are exempt from Philippine tax pursuant to Section 28 (B) (1) of the 1997 Tax Code, as amended. On the Tax Base Under the Agreement, all payments made by SMC shall be made free and clear of and without deduction for or on account of any present or future taxes. Except for branches of foreign banks located in the Philippines, non-resident foreign banks and OBUs may report for tax purposes only the actual amount of interest without considering as additional taxable income the tax assumed by the borrower pursuant to Revenue Memorandum Circular No. 46-77 and BIR Ruling No. 015-2005 dated August 23, 2005. In said ruling, the BIR held that under RMC No. 46-77, OBUs are allowed to report for tax purposes the actual amount of interest without considering as additional taxable income the tax assumed by the borrower. Hence, OBUs and FCDUs need not gross up the interest payments for purposes of the withholding tax assumed by them. The same rule should apply to the withholding tax assumed by local borrowers of foreign creditor banks not having OBUs and FCDUs to make such foreign creditor banks at par with foreign creditor banks having OBUs and FCDUs and to reduce the tax burden of the local borrowers. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will disclose that the facts are different, then this ruling shall be considered null and void. aHIDAE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service